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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 20-F

(Mark One)o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934ORý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934ORo

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 001-34914

Xueda Education Group(Exact Name of Registrant as Specified in Its Charter)

Cayman Islands(Jurisdiction of Incorporation or Organization)

A-4 Xibahe Beili, Chaoyang District
Beijing 100028, People's Republic of China(Address of Principal Executive Offices)

Junfeng Gao
Telephone: +(86-10) 6427-8899
Facsimile: +(86-10) 6427-8899
A-4 Xibahe Beili, Chaoyang District
Beijing 100028, People's Republic of China(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities
registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which RegisteredOrdinary Shares, par value US$0.0001 per share

New York Stock ExchangeAmerican Depositary Shares, each representing two Ordinary Shares


Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate
the number of outstanding shares of each of the Issuer's classes of capital or common stock as of the close of the period covered by the annual report:
138,328,640 Ordinary Shares

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes    ý No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934. o Yes    ý No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). o Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer

o Accelerated filer

ý Non-accelerated filer


Indicate
by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

ý
U.S. GAAP        o International Financial Reporting Standards as
issued        o Other
by the International Accounting Standard Boards

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17    o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934). o Yes    ý No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court. o Yes    o No



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PagePART IItem 1. Identity of Directors, Senior Management and
Advisers

1Item 2. Offer Statistics and Expected Timetable

1Item 3. Key Information

1Item 4. Information on the Company

36Item 4A. Unresolved Staff Comments

59Item 5. Operating and Financial Review and
Prospects

59Item 6. Directors, Senior Management and
Employees

87Item 7. Major Shareholders and Related Party Transactions

95Item 8. Financial Information

99Item 9. The Offer and Listing

101Item 10. Additional Information

101Item 11. Quantitative and Qualitative Disclosures About Market
Risk

110Item 12. Description of Securities Other Than Equity
Securities

110PART IIItem 13. Defaults, Dividend Arrearages and Delinquencies

113Item 14. Material Modifications to the Rights of Security Holders and
Use of Proceeds

113Item 15. Controls and Procedures

113Item 16A. Audit Committee Financial Expert

114Item 16B. Code of Ethics

114Item 16C. Principal Accountant Fees and Services

114Item 16D. Exemptions from the Listing Standards for Audit
Committees

115Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers

115Item 16F. Change in Registrant's Certifying Accountant

115Item 16G. Corporate Governance

115PART IIIItem 17. Financial Statements

116Item 18. Financial Statements

116Item 19. Exhibits

116


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CONVENTIONS THAT APPLY TO THIS ANNUAL REPORT ON FORM 20-F

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on
Form 20-F to:



This
annual report includes our audited consolidated financial statements for the years ended December 31, 2008, 2009 and 2010, and as of December 31, 2009 and 2010.

We
completed our initial public offering of 15,444,500 ADSs, each representing two ordinary shares, in November 2010. On November 2, 2010, we listed our ADSs on the
New York Stock Exchange under the symbol "XUE."

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FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains statements of a forward-looking nature. All statements other than
statements of historical facts are forward-looking statements. These forward-looking statements are made under the "safe harbor" provision under Section 21E of the Securities Exchange Act of
1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual
results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You
can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "is expected to," "intend," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "continue," "is/are likely to" or the negative of these terms or other similar expressions. These forward-looking statements include, but are not
limited to:



We
have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial
condition, result of operations, business strategy and financial needs.

You
should read these statements in conjunction with the risks disclosed in "Item 3.D. Risk Factors" of this annual report and other risks outlined in our other filings with the
Securities and Exchange Commission. Moreover, we operate in an emerging and evolving environment. New risks may emerge from time to time, and it is not possible for our management to predict all
risks, nor can we assess the impact of such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any
forward-looking statements. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events
or otherwise.

You
should read thoroughly this annual report and the documents that we refer to herein with the understanding that our actual future results may be materially different from and/or
worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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PART I

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

ITEM 3.    KEY INFORMATION

A.    Selected Financial Data.

The following selected consolidated balance sheet data as of December 31, 2009 and 2010 and the selected consolidated statement of operations data for the
fiscal years ended December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report. The following
selected balance sheet data as of December 31, 2008 have been derived from our audited consolidated financial statements not included in this annual report. The following selected consolidated
financial data as of and for the year ended December 31, 2007 have been derived from our unaudited consolidated financial information as of and for the year ended December 31, 2007 not
included in this annual report and have been prepared on the same basis as our audited consolidated financial data. The unaudited consolidated financial information includes adjustments, consisting of
normal and recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations for the periods presented.

We
have not included financial information for the year ended December 31, 2006, as such information is not available on a basis that is consistent with the consolidated financial
information for the years ended December 31, 2007, 2008, 2009 and 2010 and cannot be obtained without unreasonable effort or expense.

The
selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to our audited consolidated financial statements and related
notes and "Item 5. Operating and Financial Review and Prospects" included elsewhere in this annual report. Our audited consolidated financial statements are prepared and presented in accordance
with generally

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accepted
accounting principles in the United States, or U.S. GAAP. Our historical results are not necessarily indicative of our results expected for any future periods.

For the Year Ended December 31,2007

2008

2009

2010(in thousands of $, except share and per share numbers)Consolidated Statement of Operations Data:Net revenue


4,418


34,106


77,188


154,144Cost of revenue(1)


(5,968
)

(31,945
)

(57,326
)

(103,504
)Gross (loss)/profit


(1,550
)

2,161


19,862


50,640Operating expenses:General and administrative expenses(1)


(2,325
)

(6,871
)

(9,912
)

(23,790
)Selling and marketing expenses(1)


(1,773
)

(7,271
)

(10,624
)

(16,179
)Total operating expenses


(4,098
)

(14,142
)

(20,536
)

(39,969
)Government subsidies





52


83


26Other income











76(Loss)/profit from operations


(5,648
)

(11,929
)

(591
)

10,773Interest income


3


24


220


510(Loss)/profit before income tax expense


(5,645
)

(11,905
)

(371
)

11,283Income tax expensesCurrent


(384
)

(547
)

(1,320
)

(3,455
)Deferred








83


2,465Total income tax expenses


(384
)

(547
)

(1,237
)

(990
)Net (loss)/income


(6,029
)

(12,452
)

(1,608
)

10,293Net (loss)/income attributable to XuedaEducation Group shareholders


(6,029
)

(12,821
)

(2,585
)

9,773Net (loss)/income per share:Basic


(0.09
)

(0.19
)

(0.04
)

0.09Diluted


(0.09
)

(0.19
)

(0.04
)

0.09Net (loss)/income per ADS:Basic


(0.18
)

(0.38
)

(0.08
)

0.18Diluted


(0.18
)

(0.38
)

(0.08
)

0.18Weighted average shares used in calculating net (loss)/income per ordinary share:Basic


66,670,000


66,670,000


68,865,200


80,407,581Diluted


66,670,000


66,670,000


68,865,200


82,776,366


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As of December 31,2007

2008

2009

2010(in thousands of $)Consolidated Balance Sheet Data:Current assets:Cash and cash equivalents


5,724


11,930


36,436


211,370Prepaid expenses and other current assets


756


2,861


4,587


8,398Total current assets


6,669


14,994


42,593


242,910Total assets


7,626


18,648


48,323


263,182Current liabilities:Deferred revenue  current


9,404


23,484


41,529


61,161Total current liabilities


11,105


27,232


48,809


77,470Deferred revenue  non-current


2,650


7,283


16,454


25,020Total liabilities:


13,755


34,515


65,299


102,490Net assets


(6,129
)

(15,867
)

(16,976
)

160,692Series A1 convertible redeemable preferred shares





2,526


3,037


Series A2 convertible redeemable preferred shares





1,109


1,103


Total Xueda Education Group shareholders' equity


(6,129
)

(19,502
)

(21,116
)

160,692




For the Year Ended
December 31,2007

2008

2009

2010Selected Operating Data:Total course hours delivered (in thousands)


295


1,845


3,907


7,043Number of learning centers (at period end)


32


108


131


207Number of students served


5,515


27,139


54,130


88,761Average hourly course fee (in $)(2)


17


20


21


23


(1)Includes
the following amounts of share-based compensation expenses for the periods indicated:


For the Year Ended
December 31,2007

2008

2009

2010Cost of revenue











3General and administrative expenses











1,895Selling and marketing expenses











6Total share-based compensation expenses











1,904


(2)Represents
gross revenues, which is computed as net revenues plus business tax, divided by the total course hours delivered in the relevant period.


Exchange Rate Information

For your convenience, this annual report also contains translations of certain amounts in RMB into U.S. dollars at the rate of
RMB6.6000 to $1.00, the noon buying rate for December 30, 2010, as set forth in the H.10 statistical release of the Federal Reserve Board.

We
make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any
particular rate, the rates stated below, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign
exchange and through restrictions on foreign trade. On May 13, 2011, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.4977
to $1.00.

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The
following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated.

Noon Buying RatePeriod End

Average(1)

Low

High2006


7.8041


7.9723


8.0702


7.80412007


7.2946


7.6058


7.8127


7.29462008


6.8225


6.9477


7.2946


6.78002009


6.8259


6.8307


6.8470


6.81762010


6.6000


6.7671


6.8330


6.6000November


6.6670


6.6538


6.6892


6.6330December


6.6000


6.6497


6.6745


6.60002011January


6.6017


6.5964


6.6364


6.5809February


6.5713


6.5761


6.5965


6.5520March


6.5483


6.5645


6.5743


6.5483April


6.4900


6.5267


6.5477


6.4900May (through May 13, 2011)


6.4977


6.4939


6.4986


6.4915


Source: Federal Reserve Bank of New York and Federal Reserve Board (1)Annual
averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are
calculated by using the average of the daily rates during the relevant month.


B.    Capitalization and Indebtedness

Not Applicable.

C.    Reasons for the Offer and Use of Proceeds

Not Applicable.

D.    Risk Factors

Risk Factors Relating to Our Business and Industry

We may not be able to continue to attract students to enroll in our programs or retain our existing students. As a result, our net revenue may decline and we may not be able
to maintain profitability.

The success of our business largely depends on our ability to attract new students and retain existing students as well as the amount
of course fees our students are willing to pay, which in turn depends on a variety of factors. These factors include our ability to refine our personalized service model, improve our services, develop
new programs and enhance existing programs to respond to changes in market trends and student demands, expand our geographic reach, manage our growth while maintaining the consistency of our service
quality, effectively market our programs to a broader base of prospective students and respond to competitive pressures. If we are unable to continue to attract students to enroll in our programs or
retain existing students without a significant decrease in course fees or a significant increase in selling and marketing expenses, our net revenue may decline, and we may not be able to maintain
profitability, either of which could result in a material adverse effect on our business, results of operations and financial condition.

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We may not be able to continue to attract and retain qualified service professionals. As a result, we may not be able to maintain consistent service quality throughout our
service network, and our brand, business and results of operations may be materially and adversely affected.

Our service professionals, including instructors, education consultants, study counselors and psychological counselors, are critical to
maintaining the quality of our services and programs as well as our brand and reputation because they interact with our students on a regular basis and because our personalized tutoring service model
requires significantly more service professionals per student than do other service models using class-based tutoring. We must continue to attract qualified service professionals who have the relevant
experience, expertise and qualifications that meet our requirements, of which professionals there are a limited number. We must provide competitive compensation and benefits packages to attract and
retain qualified service professionals. If we are unable to hire qualified service professionals without incurring significant incremental recruitment and compensation expenses, our business, results
of operations and financial condition may be materially and adversely affected.

Historically,
the attrition rates for our service professionals were 23.0%, 26.0% and 22.3% for 2008, 2009 and 2010, respectively. The attrition of our service professionals has
generally resulted from our performance-driven salary structure that comprises of variable components, career development prospects perceived by our service professionals and our stringent performance
evaluation process and is affected by seasonality associated with the academic calendar. While we have developed training programs to help our service professionals adapt to our business culture and
enhance their internal career development opportunities in order to maintain a healthy level of attrition, we cannot assure you
that the programs we have developed or may adopt to retain our service professionals will be effective in allowing us to maintain our target service professional attrition levels. If we are unable to
retain qualified service professionals and reduce their attrition rate without incurring significant retention expenses, our business, results of operations and financial condition may be materially
and adversely affected.

A
small portion of our tutoring courses are delivered by instructors who are teachers at public schools and work at our learning centers on a contractual basis. The practice of paid
tutoring by teachers of public schools has recently received increased regulatory scrutiny. Some provinces and municipalities where we have substantial business operations, such as Beijing, Tianjin,
Jiangsu, Hunan, Guangdong and Shaanxi, have promulgated local regulations prohibiting public school teachers from providing paid tutoring services. Similar regulations may be adopted in more provinces
and municipalities where we have substantial business operations or plan to expand our service network. In 2010, approximately 3.6% of our total course hours were delivered by contract instructors who
are teachers at public schools. If these instructors choose to, or are forced to, discontinue their employment relationship with us to comply with the relevant local regulations, we will need to seek
new instructors to replace them. We cannot assure you we will be able to find replacements at a reasonable cost on a timely basis, if at all. In addition, we will experience a reduced supply of
instructors in those provinces and municipalities, which will further increase the strain on and difficulty of our recruiting efforts. Furthermore, while none of the existing local regulations
currently imposes any penalty on service providers like us for hiring full-time public school teachers, we cannot assure you that these regulations will not be amended, or that new
regulations will not be adopted, to impose such penalties in the future.

In
addition, we may not be able to hire and retain enough qualified service professionals to keep pace with our anticipated growth at acceptable costs and on a timely basis while
maintaining consistency in the quality of our services across our learning center network. Shortages of qualified service professionals, actual or perceived decreases in the quality of our services or
increases in recruiting, compensation or retention costs in one or more of our current or future markets may impede our expansion efforts and may have a material adverse effect on our business
prospects and results of operations.

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Our limited history of offering personalized tutoring services may not serve as an adequate basis for evaluating our future prospects, financial condition and results
of operations.

Although our founders were in the educational service business since as early as 2001, we only started our personalized tutoring
services in 2004 and have experienced significant growth only since 2007. Our limited operating history may not provide a meaningful basis on which to evaluate our business. Despite the growth in our
revenue in recent years, we incurred net losses for the fiscal years ended December 31, 2008 and 2009. Although we recorded net income in
2010, we cannot guarantee you that we will remain profitable or will not incur net losses in the future. We expect that both our cost and our operating expenses will increase as we continue our
business expansions and that we may face difficulties maintaining profitability. Thus, our limited operating history may not provide you with a sufficient basis upon which to evaluate our future
prospects, financial condition and results of operations.

We have incurred losses in the past and may incur losses in the future.

We incurred net losses attributable to our company of $6.0 million, $12.5 million and $1.6 million in 2007, 2008
and 2009, respectively, and recorded an accumulated shareholders' deficit of $21.7 million as of December 31, 2009. As we expect our costs to increase as we continue to expand our
business and operations, we may incur losses in the future. Although we generated net income of $10.3 million in 2010, we cannot assure you that we will be able to sustain profitability in
the future.

We may not be able to manage our business expansion and increasingly complicated operations effectively, which could harm our business.

We have expanded rapidly in recent years and plan to continue expanding our operations primarily through organic growth. The number of
our learning centers increased from 108 as of December 31, 2008 to 207 as of December 31, 2010. This expansion has resulted, and will continue to result, in substantial
demands on our management, personnel, operational, technological and other resources. To manage the expected growth of our operations, we need to expand our existing operational, administrative,
technological and financial systems, procedures and controls as well as expand, train and manage our employee base. In addition, the geographic dispersion of our operations requires significant
management resources. We cannot assure you that our current and planned expansion of and upgrade in personnel, systems, procedures and controls will be adequate to support our future operations, or
that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate any entities we may acquire or any strategic alliances we
may form into our operations. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities and to manage
our existing operations, which in turn may have a material adverse effect on our financial condition and results of operations.

In
addition, as a part of our growth strategy, we intend to form strategic alliances and make selective complementary acquisitions to help drive future growth. Our strategic alliances
and acquisitions involve substantial risks and uncertainties, including:



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If
any one or more of these risks or uncertainties materialize or if any of the strategic objectives we contemplated is not achieved, our strategic alliances and acquisitions may not be
beneficial to us and may have a material adverse effect on our business, financial condition and results of operations.

If we are unable to achieve or maintain economies of scale with the expansion of our network of learning centers, our results of operations may be materially and adversely
affected.

The establishment of each new learning center involves an upfront investment in development of the facilities, hiring of service
professionals, and incurs selling, marketing, administrative and other operating expenses. Our revenue and profitability depend on, among other things, the number of students we can attract to our new
learning centers, the number of course hours they purchase, the amount of course fee they are willing to pay, as well as the cost savings we may be able to achieve by sharing administration,
procurement and other resources among the various learning centers. If the new learning centers are unable to generate sufficient revenue to offset the development and operating costs, or if we are
unable to effectively achieve resource sharing among the learning centers to reduce costs, our results of operations will be adversely affected.

We may not be able to renew leases, control rent increases at our existing learning center locations or obtain leases at premium locations for new learning centers at
reasonable prices.

Except for one learning center in Hefei, Anhui province, all of our other learning centers are presently located on leased premises.
The term of our leases for the learning centers typically ranges from one to five years. Some of our learning centers have entered into multiple leases of multiple premises in the same building in
order to obtain sufficient operational space. Some of our other learning centers operate in different buildings in the same geographic location, and therefore have multiple leases. As a result, as of
December 31, 2010, we had a total of 207 learning centers and 302 leases for these learning centers. Among our 302 learning center leases, 87 will expire by
December 31, 2011 and 60 do not contain a priority renewal provision which provides the lessee with the right of first refusal to renew the lease on the terms and conditions offered by
the lessor for renewal upon the expiration of the lease. At the end of the lease term, we may need to negotiate for a new lease or an extension of the existing lease and may be forced to find a new
lease location, which could involve substantial rent increases and leasehold improvement costs. In addition, we compete with numerous other businesses for sites in a highly competitive market, and
some landlords and developers may exclusively grant locations to our competitors. As a result, we may not be able to obtain new leases or renew existing ones on acceptable terms or at all, which could
adversely affect our business, results of operations and financial condition.

Certain of our leases may subject us to government penalties or may be challenged by property owners or other third parties.

Some of the premises of our learning centers are located on land owned by villages and rural organizations, or collectively-owned land,
which is not permitted to be leased for a non-agricultural use under PRC law. Certain other of our leased properties are located on land the use of which is restricted and not permitted
for our current use. As of December 31, 2010, we operated a total of

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207 learning
centers. As of the date of December 31, 2010, a total of approximately 7,635 square meters of our leased properties for these learning centers, representing
approximately 5% of the total size of our learning center leases, were located on land that cannot be used for our current purpose. Our lease of properties located on such land may subject us to
government penalties at a rate we believe, based on our review of the applicable regulations, up to RMB30 ($4.55) per square meter, or up to RMB229,050 ($34,740) in total. As of the date of this
annual report, we have not been subject to any penalty for leasing properties built on such land.

In
addition, some lessors of premises we lease for the operation of learning centers have not provided us with evidence of their valid and enforceable building ownership or evidence of
their rights or authority to lease or sub-lease such properties. As of December 31, 2010, leases for properties with such lease right deficiencies amounted to approximately
18,740 square meters, representing approximately 11% of the total size of all of our learning center leases.

We
were aware of these deficiencies as a result of our due diligence investigation conducted by our local management teams prior to our entry into these leases. Our local management
teams follow our procedure for identifying and assessing risks in connection with our leases, and report their findings to our management team at our corporate headquarters, who make a final business
decision after assessing of the likely impact of the relevant deficiencies. Certain of these deficiencies are caused by the time required by the relevant government authorities to issue the title
certificates after acquisition or change of ownership of the building, typically ranging from one to two years. Other deficiencies were outweighed by the business considerations, such as location and
ease of access and rent.

As
of the date of this annual report, no dispute has arisen as to the legal title of any of such leased properties or our right to occupy the properties. If any such dispute were to
arise, we may be required to vacate such properties under dispute and relocate, which will disrupt our tutoring services and adversely affect our customer relationship. We may also be subject to
administrative penalties for our lease of properties not permitted to be used for our current purpose. If we are not able to find desirable premises to relocate to, or if relocation cannot be
completed with reasonable costs and on a
timely basis, our business, financial condition and results of operations may be materially and adversely affected.

Our business depends on the strength of our reputation and brand in the marketplace. We may not be able attract new students or to retain existing students if we cannot
continue to protect, leverage and enhance our reputation and brand successfully in the marketplace.

Our operational and financial performance and the successful growth of our business are highly dependent on our reputation and market
awareness of our "Xueda" brand. We believe maintaining and enhancing our reputation and our "Xueda" brand is critical to maintaining and enhancing our competitive advantage and growing our business.
The personalized tutoring services we offer to primary and secondary school students throughout many provinces and municipalities in China place significant demands on us to maintain the consistency
and quality of our services to ensure our reputation and brand do not suffer from any actual or perceived deterioration in the quality of our services. As we continue to grow in size, expand our
services and extend our geographical reach, maintaining the quality and consistency of our services may be more difficult. Any alleged deterioration in the quality of our services or any negative
publicity about our services or learning centers, regardless of its veracity, could harm our brand image and have a material adverse effect on our business and results of operations.

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We face significant competition in the services we offer and in each geographic market in which we operate. If we fail to compete effectively, we may lose market share, and
our results of operations and financial condition may be materially and adversely affected.

In China, the educational services market, particularly the tutoring sector, is rapidly evolving, highly fragmented and intensely
competitive. According to the IDC report, the top five players by revenue accounted for 1.6% of the primary and secondary school tutoring market in terms of total revenues for 2009. With a market
share of 0.42% by revenue in this highly fragmented market, we were the largest primary and secondary school tutoring service provider in 2009 according to the IDC report. We expect competition in
this sector to persist and further intensify. We face competition from other large market participants and a number of smaller, mostly local and regional players. Moreover, competition is particularly
intense in some of the key geographic markets in which we operate, such as Beijing and Shanghai.

We
also face competition from many different companies which focus on multiple areas related to our business and are able to cross-sell their services across their business
lines. These
companies may be able to more quickly adapt to changing technology, student preferences and market conditions in these markets than us and may, therefore, have a competitive advantage over us.

The
increasing use of the Internet and advances in Internet- and computer-related technologies are eliminating geographic and cost-entry barriers to providing tutoring
services. As a result, many international companies that offer online test preparation and language training courses may decide to expand their presence in China or to try to penetrate the China
market. Many of these international companies have strong education brands, and students and parents in China may be attracted to these companies' programs for the perceived advantages these programs
may offer. In addition, many smaller companies, both domestic and international, are able to use the Internet to quickly and cost-effectively offer their services to a large number of
students with less capital expenditure than previously required.

Competition
could result in loss of market share and revenues, higher expenses and lower profit margins; it could also limit our future growth. A number of our current and potential
future competitors may have greater financial and other resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of their
services and products and respond more quickly than we can to changes in student needs, testing materials, admissions standards or new technologies. They also compete with us in recruiting for
qualified service and management professionals and may attempt to solicit our employees.

In
response to competition, we may have to reduce course fees or increase spending in order to retain or attract students or to pursue new market opportunities. We may also have to incur
additional recruiting, compensation and retention expenses in order to attract and retain service professionals and management personnel. We cannot assure you that we will be able to compete
successfully against current and future competitors. If we are unable to maintain our competitive position or otherwise respond to competitive pressures in a timely and effective manner, we may lose
market share and our results of operations and financial condition may be materially and adversely affected.

We face risks related to severe weather conditions, natural disasters, health epidemics and other similar events, any of which could result in reduced attendance or
temporary or long-term closure of our facilities.

Our business could be disrupted or otherwise adversely affected by severe weather conditions, such as snow, storm or hurricane, natural
disasters, such as earthquakes, health epidemics, such as an outbreak of avian influenza or severe acute respiratory syndrome, and other similar events. The occurrence of any such event could result
in reduced attendance in, or even require the temporary or long-term closure of, our learning centers and other business facilities, and could severely disrupt our business operations and
adversely affect our results of operations and financial condition.

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Our business depends on the continuing efforts of our senior management team, local management teams and other key personnel, and our business may be harmed if we lose
their services.

Our future success depends heavily upon the continuing services of the members of our senior management team, as well as the local
management teams that directly manage and operate our learning centers at the various locations throughout China. For example, Mr. Xin Jin, our founder and chief executive officer,
Mr. Jun Wang, our president and Mr. Junfeng Gao, our chief financial officer, are key to our business. If one or more members of our senior management team or a substantial number of the
members of our local management teams are unable or unwilling to continue in their present positions, we may not be able to replace them easily, if at all. Our business may be disrupted, and our
financial condition and results of operations may be materially and adversely affected.

In
2008, 2009 and 2010, the attrition rates of our senior management team were nil, 17% and nil, respectively, and the attrition rates of our local management team were 31%, 17% and 9%,
respectively, over the same period. In addition, although each of our employees has entered into a confidentiality and non-competition agreement with us, if any member of our senior
management team or any of the key members of our local management teams breaches such obligations and joins a competitor or forms a competing company, we may lose students, instructors, key
professionals and staff members. Competition for experienced management personnel in the private education sector is intense, and the pool of qualified candidates is very limited. We may not be able
to retain the services of our senior management team or key members of our local management teams, or attract and retain high-quality senior management team or key members of local
management teams in the future, which could have a material adverse effect on our business and results of operations.

If we are not able to continually enhance our services and adapt them to rapid pedagogical innovations and evolving student needs and preferences, we may lose market share,
and our business could be adversely affected.

Our services and customer satisfaction are vital to the success of our business. The market for such services is characterized by rapid
pedagogical innovations and evolving user preferences. We must quickly identify areas for improvement and enhance our services to adapt to any pedagogical innovation, changes in curriculum and
evolving student needs and preferences. For example, we expect to invest a total of approximately $3 million in the development and launch of supplementary online service offerings in selected
academic subjects on a pilot basis to augment our tutoring services and as an aid to our personalized content delivery but the timing of the full-scale launch of such services will only be
determined based on the results of this limited pilot test. We may not be able to adapt these planned supplementary online service offerings and other services in a timely and
cost-effective manner. If improvements to our services are delayed or are not aligned with market expectations, needs or preferences, we may lose market share, and our business could be
materially and adversely affected.

If we fail to successfully develop and introduce new services in time, our competitive position and ability to generate revenue could be harmed.

Our future success depends in part on our ability to develop new services. The planned timing or introduction of new services is
subject to risks and uncertainties. Actual timing may differ materially from original plans. Unexpected technical, operational or other problems could delay or prevent the introduction of one or more
of our new services. Moreover, we cannot assure you that any of our new services will achieve widespread market acceptance or generate incremental revenue. If our efforts to develop, market and sell
new services to the market are not successful, our financial position, results of operations and cash flows could be materially and adversely affected.

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Failure to adequately and promptly respond to changes in curriculum, testing materials and standards or the current assessment and testing systems and admission standards in
China could cause our services and products to be less attractive to our students.

There are continuous changes in the focus of the subjects and questions tested in high school and college entrance exams in China and
the format of the tests and the manner in which the tests are administered. These changes require us to continually update and enhance our
curriculum, test preparation materials and teaching methods. Any inability to track and respond to these changes in a timely and cost-effective manner would make our services and products
less attractive to students, which may materially and adversely affect our reputation and ability to continue to attract students without a significant decrease in course fees. Further, we understand
the Chinese Ministry of Education, or the MOE, has been discussing reforms of the curriculum of primary and secondary schools. Therefore, school curriculum will likely undergo changes, and our
tutoring programs and materials will need to be adapted for such changes. Failure to respond in a timely manner to such changes will adversely impact the marketability of our services
and products.

A
substantial number of our students enroll in our tutoring program to achieve better exam performance in school and in entrance exams. However, educational institutions and government
authorities in China have initiated discussions and conducted some early experiments in China on school admissions. Generally, these discussions and experiments exhibit a trend of basing
admissions decisions less on entrance exam scores and more on a combination of other factors, such as past academic record, extracurricular activities and comprehensive aptitude evaluations. There
have been certain changes in some geographic areas in the way the high school entrance exam is administered. In 2009, 76 universities and colleges were allowed to recruit up to 5% of their
students through independently administered tests according to a notice promulgated by the MOE, although students admitted in this manner still need to meet certain thresholds in the national college
entrance exam. It has been reported that the number of such universities and colleges will further increase. If the use of admissions tests in China declines or falls out of favor with educational
institutions and government authorities and if we fail to respond to these changes, the demand for our tutoring services may deteriorate, and our business will be materially and adversely affected.

In the course of preparing our consolidated financial statements, we have identified a material weakness in our internal control over financial reporting. If we fail to
maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the
market price of our ADSs may be adversely affected.

In connection with the preparation and external audit of our consolidated financial statements, we and our independent registered
public accounting firm identified a material weakness, as defined in the U.S. Public Company Accounting Oversight Board Standard AU Section 325, Communications About Control Deficiencies
in an Audit of Financial Statements, or AU325, in our internal control over financial reporting as of December 31, 2010. As defined in AU325, a "material weakness" is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.

The
material weakness identified related to the lack of accounting personnel with appropriate U.S. GAAP knowledge. Neither we nor our independent registered public accounting firm
undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial
reporting as we and they will be required to do under Section 404 of the U.S. Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. It is possible that, had we performed a formal
assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional
control deficiencies may have been identified. Following the identification of this material weakness, we have taken measures and plan to continue to

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take
measures to remedy this weakness. However, the implementation of these measures may not fully address this material weakness in our internal control over financial reporting, and we cannot
conclude that it has been fully remedied.

As
a public company in the United States, we are subject to the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires that we include a report from management
on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011. In addition,
beginning at the same time, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may
conclude that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public
accounting firm may disagree and may decline to attest to our management's assessment or may issue an adverse opinion. Any of these possible outcomes could result in an adverse reaction in the
financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely affect the trading price of our ADSs.

We
may identify control deficiencies as a result of the assessment process we will undertake in compliance with Section 404 of the Sarbanes-Oxley Act. We plan to remediate control
deficiencies identified in time to meet the deadline imposed by the requirements of Section 404 of the Sarbanes-Oxley Act, but we may be unable to do so. Our failure to establish and maintain
effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial reporting processes, which in turn could harm our business and
negatively impact the trading price of our ADSs.

We may not be able to adequately protect our intellectual property, and our current or future competitors may independently develop intellectual property similar to ours,
which could cause us to be less competitive.

Our trademarks, trade names, copyrights, trade secrets and other intellectual property rights are important to our success.
Unauthorized use of any of our intellectual
property may adversely affect our business and reputation. We rely on a combination of copyright, trademark and trade secret laws and confidentiality agreements with our employees and others to
protect our intellectual property rights. Certain trademarks and logos, including " LOGO", "Xueda," " LOGO" and " LOGO", originally registered by Xueda Education Technology
(Beijing) Co., Ltd., or Xueda Technology, our variable interest entity, and exclusively used by us before
have been transferred to our PRC subsidiary, Xuecheng Century as approved by the Trademark Office of the State Administration for Industry and Commerce in China, or the SAIC. In addition, Xuecheng
Century is in the process of applying to the Trademark Office of SAIC for the registration of certain other trademarks and logos, including " LOGO" and " LOGO", as well as "Elite Class" for our small-group tutoring programs. Furthermore, our PRC subsidiary, Xuecheng Century, is in the
process of registering utility model
and design patents with PRC Intellectual Property Bureau for certain teaching utilities it designed and developed, such as various kinds of multi-functional teaching desks.

Our
main web site is located atwww.21edu.com. In addition, as we have not registered copyrights with respect to our internally developed
data in our educational resource database and course materials, we may not be able to sufficiently protect these data and course materials. To date, we are not aware of any unauthorized use of or
infringement upon our intellectual property. Nevertheless, it may be possible for third parties to obtain and use our intellectual property without authorization. The unauthorized use of intellectual
property is widespread in China, and enforcement of intellectual property rights by Chinese regulatory agencies is inconsistent. Moreover, litigation may be necessary in the future to enforce our
intellectual property rights. Future litigation could result in substantial costs and diversion of our management's attention and resources and could disrupt our business. Given the relative
unpredictability of China's legal system and potential difficulties in enforcing a court judgment in China, we may be unable to halt the unauthorized use of our intellectual property through
litigation.

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Failure
to adequately protect our intellectual property could materially adversely affect our competitive position and our ability to attract students, which could have a material adverse effect on
our financial condition and results of operations.

We may be exposed to infringement claims by third parties, which claims could cause us to pay significant damage awards or settlement payments.

While to date, no material infringement claims has been brought against us, third parties may initiate litigation against us alleging
infringement upon their intellectual property rights. In the event we are required to pay significant damage awards or settlement payments, our results of operations and financial condition may be
materially and adversely affected. In addition, in the event that we are prevented from using certain intellectual property rights and fail to develop or license alterative intellectual property
rights on a timely basis, our business could be harmed. In addition, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our
results of operations.

We rely heavily on our information systems, and if we fail to further develop our technologies, or if our systems, software, applications, database or source code contain
"bugs" or other undetected errors, our operations may be seriously disrupted.

The successful development and maintenance of our systems, software, applications and database, such as the information technology
infrastructure underlying our personalized service delivery model, is critical to the attractiveness of our tutoring programs and management of our business operations. In order to achieve our
strategic objectives and remain competitive, we must continue to develop and enhance our technology. These efforts may require us to acquire additional equipment and software and develop new
applications. In addition, our technology platform, upon which our management systems and online programs operate, and our other databases, products, systems and source codes could contain undetected
errors or "bugs" that could adversely affect their performance.

To
date, our information systems have not encountered material errors or technical issues that have adversely affected or disrupted our operations. If we encounter errors or other
service quality or reliability issues, or if we are unable to design, develop, implement and utilize information systems and the data derived from these systems, our ability to realize our strategic
objectives and our profitability could be adversely affected, which may cause us to lose market share, harm our reputation and brand names, and materially adversely affect our business and results
of operations.

Unexpected network interruptions, security breaches or computer virus attacks and system failures could have a material adverse effect on our business, financial condition
and results of operations.

Any failure to maintain satisfactory performance, reliability, security or availability of our network infrastructure may cause
significant damage to our reputation and our ability
to attract and maintain students. Major risks involving our network structure include:



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To date, we have not encountered any material unexpected network interruptions, security breaches, computer virus attacks or system failures. However, any network
interruption or inadequacy that causes interruptions in the availability of our web sites or deterioration in the quality of access to our web sites could reduce customer satisfaction and result in a
decrease in the number of students using our services. In addition, we may be subject to security breach caused by a computer hacker, which could involve attempts to gain unauthorized access to our
systems or personal information stored in our systems or cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. As a result, we may be required
to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.

Furthermore,
increases in the volume of traffic on our web sites could strain the capacity of our existing computer systems, which could lead to slower response times or system failures.
This result would cause a disruption or suspension in our internal management or our online presence and programs, which would harm our brand and reputation and thus negatively affect our net revenue
growth. We may need to incur additional costs to upgrade our computer systems in order to accommodate increased demand if we anticipate our systems cannot handle higher volumes of traffic in
the future.

All
of our servers and routers, including backup servers, are currently hosted by us within China. We do not currently maintain any backup servers outside of China. To improve
performance and prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our web sites to mirror our online resources.

Any significant interruption in the operations of our data storage center could cause a loss of data and adversely affect our ability to manage our network and technological
infrastructure.

We host most of our data relating to our services, learning centers and operations in our data storage center in Beijing and have
contracted with an outside provider for data backup services. We have not experienced any significant interruption. However, our current data backup arrangements may not be adequate to prevent an
interruption or loss of our operational data due to natural disasters, fire, power interruption, act of terrorism or other unanticipated catastrophic events. Any significant interruptions or loss of
data as a result of these events or our failure to successfully expand or upgrade our systems could reduce our ability manage our network and technological infrastructure and have an adverse impact on
our business operations.

Any significant interruption in the operations of our call center could adversely affect our ability to respond to potential customers' inquiries and other service requests
in a timely manner.

We have a call center in Beijing which responds to inquiries from potential customers and provides customer service to our existing
customers. We have not experienced any significant interruption in the operations of our call center. We do not currently have a risk mitigation plan for our call center to prevent an interruption of
its operation due to natural disasters, accidents or other events. Any significant interruptions as a result of these events or our failure to successfully expand or upgrade our systems or manage the
necessary expansions or upgrades in the call center could reduce our ability to respond to customer inquiries or service requests, which could in turn result in the loss of potential customers and
damage our reputation.

We do not have any liability or business disruption insurance, and liability claims against us such as those due to injuries suffered by our students or other people at our
facilities could adversely affect our reputation and our financial results.

We could be held liable for accidents that occur at our learning centers or otherwise arise out of our operations. In the event of
personal injuries, fires or other accidents suffered by students or other people, we could face claims alleging that we were negligent, provided inadequate supervision or

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otherwise
liable for the injuries. The business insurance industry in China is still at an early stage of development, and insurance companies in China offer limited business insurance products. We
currently
do not have any liability insurance or business disruption insurance. A successful liability claim against us due to injuries suffered by our students or other people at our facilities could adversely
affect our reputation and our financial results. Even if unsuccessful, such a claim could cause unfavorable publicity and require substantial cost to defend and divert the time and attention of
our management.

Our grant of employee share options, restricted shares or other share-based compensation and any future grants could have an adverse effect on our net income.

U.S. GAAP prescribes how we account for share-based compensation and may have an adverse or negative impact on our results of
operations or the price of our ADSs. U.S. GAAP requires us to recognize share-based compensation as compensation expense in the statement of operations generally based on the fair value of
equity awards on the date of the grant, with compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. The expenses
associated with share-based compensation may reduce the attractiveness of issuing share options or restricted shares under our equity incentive plan. However, if we do not grant share options or
restricted shares, or reduce the number of share options or restricted shares we grant, we may not be able to attract and retain key personnel. If we grant more share options or restricted shares to
attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.

Some of our learning centers may be deemed by government authorities to operate beyond their authorized business scope, which could expose us to certain risks.

Based on the advice of our PRC counsel, we understand that under the framework and general principles of the PRC Education LawandLaw for Promoting Private Educationand theImplementation
Rules for the Law for Promoting Private Education, the operation of afterschool tutoring classes is not in violation of PRC laws and regulations. Under the relevant PRC laws,
regulations and administrative requirements, if a company either obtains a permit from the relevant education authority to operate private tutoring schools or includes the relevant services in the
authorized scope of business as specified in its business licenses, it could operate private learning centers. As of December 31, 2010, we operated a total of 207 learning centers. As of
the date of this annual report, 128 of these learning centers have been either operated under private tutoring schools with the prerequisite permits or operated under the subsidiaries of our VIEs with
"tutoring services" in the business scope of their respective business licenses. However, 49 of these learning centers have included, among others, "education information" or "education technology
related consultation" in their respective authorized scopes of business, but are not affiliated with private tutoring schools with the prerequisite permits, nor do they have "tutoring services" in
their scope of business. The relevant PRC laws, regulations and administrative requirements do not clearly provide whether companies operating such one-on-one learning centers
also need to specifically include "tutoring services" in their authorized scope of business. We cannot assure you that these of our VIE's subsidiaries will not be deemed to have exceeded the
authorized scope of their respective business licenses. In addition, 30 of our learning centers do not have "tutoring services" or any education related services in their authorized scope of their
business licenses, nor are these learning centers operated by schools with the prerequisite licenses. For these 79 learning centers, we are in the
process of expanding the authorized scope of business for relevant subsidiaries and, as applicable, applying for the permit for their tutoring services at minimal cost. We are uncertain of the time it
may take to expand the business scope of the relevant subsidiaries. In addition, it normally takes three to six months to obtain such permit or expand the relevant business scope.

The
VIE's subsidiaries engaging in services exceeding the authorized business scope stated in their business licenses may be ordered to complete the registration for change of business
scope within a given period, failing which each company is subject to a one-time fine of RMB10,000 to RMB100,000.

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Under
the PRCAdministrative Penalties Law, these fines would not be assessed multiple times against the same entity for the same
non-compliant act. In addition, under the PRCRegulations on Company Registration, or the Company Registration Regulations, and other
relevant regulations, if a company conducts its business beyond its authorized business scope and in violation of other relevant regulations, it may be ordered to cease its operation. To date, none of
our existing learning centers operated by Xueda Information and its subsidiaries has been imposed any administrative penalties including fines.

As
we continue to expand our tutoring network, the new learning centers we establish will be engaging in substantially identical business operations as those of our existing learning
centers. As a result, our new learning centers will be subject to the same risks as our existing learning centers with respect to their operations outside their respective authorized scope
of business.

Rules and regulations issued by certain government authorities may restrict or prohibit after-class tutoring services. Similar or more stringent rules or regulations that
limit our ability to offer our services may be introduced in the future and materially and adversely affect our business, results of operations and financial condition.

Certain local government authorities had in the past issued notices or rules which prohibit private schools from offering after-school
tutoring services by themselves or through cooperation with public schools. However, local government practices are inconsistent among the cities where we operate in implementing and enforcing such
notices or rules. We have obtained the required education permits or business licenses for our tutoring services in most of these cities. None of our local operations has been subject to any penalties
or other regulatory actions for violation of such notices or rules. In July 2010, the MOE issued theNational Guidance on Mid- to Long-term
Education Reform and Development, or the National Education Guidance, which expressly requires, among others, governments at various levels to subject private after-school
tutoring service providers to appropriate regulation. We believe that the National Education Guidance reflects the latest developments of the PRC central government's policy, which supports an
appropriately regulated after-school tutoring sector rather than prohibits the after-school tutoring business. Based on the above reasons, we do not believe that these prohibitive local notices and
rules
will likely have any material effect on our business operations or expansion. However, if the local government authorities in any of the relevant cities start strictly enforcing the existing
prohibitive notices or rules, or if future government rules and regulations entirely prohibit us from offering after-class tutoring services or impose more stringent limitations on the type or range
of after-class tutoring services that we may offer, our business, results of operations and financial condition will be materially and adversely affected.

The discontinuation of any of the preferential tax treatments currently available to us in the PRC or imposition of any additional PRC taxes on us could adversely affect our
financial condition and results of operations.

China has passed a newEnterprise Income Tax Law, or the EIT Law, and the Regulation on the Implementation of the
Enterprise Income Tax Lawof the PRC, or the EIT Implementation Rules, both of which became effective on
January 1, 2008. The EIT Law significantly curtails tax incentives previously granted to foreign-invested enterprises in China. The EIT Law (i) reduces the statutory rate of the
enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional
phase-out rules promulgated by the State Council on December 26, 2007, and (iii) introduces new tax incentives, subject to various qualification criteria.

Under
PRC laws and regulations, an enterprise that qualifies as a software enterprise may enjoy preferential tax benefits. Xuecheng Century was certified as a software enterprise in
April 2010 and as a result is eligible for a two-year exemption of income tax from the first year it generates taxable

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income,
followed by a 12.5% income tax rate for another three years. Such preferential tax treatment must be filed with tax authorities and software enterprises are subject to annual assessment.
Enterprises which have not passed the annual assessment are not entitled to the above preferential treatments. If Xuecheng Century fails to maintain the status of a software enterprise, it will not be
able to enjoy the reduced tax rate, and its tax rate will increase to 25% or the then current rate. If PRC laws and regulations were to phase out preferential tax benefits currently granted to
software enterprises, Xuecheng Century would be subject to the standard enterprise income tax rate, which currently is 25%. Loss of this preferential tax treatment could have a material adverse effect
on our financial condition and results of operations.

Our business and results of operations may be adversely affected by a severe and prolonged global economic downturn and the corresponding slowdown of the Chinese economy.

Recent global market and economic conditions have been unprecedented and challenging with recession in most major economies persisting
in 2009 and significant market volatility in 2010. Continued concerns about the systemic impact of a potentially long-term and widespread recession, energy costs, geopolitical issues and
the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The difficult economic outlook has negatively
affected business and consumer confidence and contributed to unprecedented volatility levels. The Chinese economy also faces challenges. The stimulus plans and other measures implemented by the
Chinese government may not work effectively or quickly enough to maintain economic growth in China or avert a severe economic downturn.

Since
we derive all of our revenues from our operations in China, any prolonged slowdown in the Chinese economy may have a negative impact on our business and results of operations. Our
revenues depend on our students' spending on tutoring services, which in turn depends on the level of current and expected household disposable income and willingness to spend of the students'
families. As there are still substantial uncertainties in the current and future conditions of global and Chinese economies, our potential customers may reduce their spending on tutoring services or
seek less expensive alternatives. Moreover, since we require prepayment of course fees, certain potential customers who prefer installment payments due to economic and other concerns may be or may
become unwilling or unable to purchase our services. Further disruptions of the financial markets could also significantly restrict our ability to obtain financing in the capital markets or from
financial institutions, if and when such financing is needed.

We generate a substantial portion of our revenues from a small number of cities in China. Any event negatively affecting the private education industry in these cities could
have a material adverse effect on our business and results of operations.

For the fiscal year ended December 31, 2010, we generated approximately 15.2% of our revenue from learning centers located in
Beijing. The next five cities where we derived most revenues, including Shanghai, Guangzhou, Xi'an, Nanjing, and Tianjin, collectively contributed approximately 33.8% of our revenue for 2010. We
expect these cities to continue to constitute important sources of our revenues. If any of these cities experiences an event negatively affecting its private education industry, such as a severe
economic downturn, a natural disaster or outbreak of contagious disease, or if any of these cities adopts regulations relating to private education that place additional restrictions or burdens on us,
our overall business and results of operations may be materially and adversely affected.

Our business may be, directly or indirectly, affected by misconduct of other educational service providers.

The tutoring sector in China is rapidly developing, and we, like all other participants in the sector, are still enhancing our brand
awareness and building trust with students and their parents, which is critical to our business. Actual or perceived misconduct or bankruptcy of other similar service providers may lead to the
distrust of tutoring by students and their parents, and we may suffer from reduced

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business
as a result. Misconduct or bankruptcy of third parties, as well as any allegation or perception of such, is beyond our control, and if any such event occurs, it may have an adverse effect on
our business.

Risks Related to Regulation of Our Business and Our Corporate Structure

All aspects of our business are subject to extensive regulation in China. We may not be in full compliance with these regulations, and our ability to conduct business is
highly dependent on our compliance with this regulatory framework. If the PRC government finds the agreements that establish the structure for our business operations do not comply with applicable PRC
laws and regulations, we could be subject to severe penalties.

The Chinese government regulates all aspects of our business and operations, including licensing of parties to perform various
services, standards for the operations of learning centers and foreign investments in the education industry. The laws and regulations applicable to the education sector are subject to amendments from
time to time, and new laws and regulations may be adopted, some of which may negatively affect our business, either retroactively or prospectively.

We
conduct our learning center business in China primarily through contractual arrangements between Xuecheng Century, our PRC subsidiary, and its affiliated entities and persons in China
such as our VIE and its shareholders. Our VIE and its subsidiaries are the entities that hold certain licenses and permits relating to the tutoring business in China. We have been and expect to
continue to be dependent on our VIE and its subsidiaries to operate our business.

If
our ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain any of the required licenses
and permits, the relevant PRC regulatory authorities including the MOE and the Ministry of Commerce, or MOFCOM, which regulate the education industry and foreign investment in China, respectively,
would have broad discretion in dealing with such violations, including:



The
imposition of any of these penalties could have a material adverse effect on our business.

We rely on contractual arrangements with our VIE and its shareholders for substantially all of our China operations, which may not be as effective as direct ownership in
providing operational control.

We have relied and expect to continue to rely on contractual arrangements with our VIE and its shareholders to operate our education
business. For a description of these contractual arrangements, See "Item 4. Information on the Company  Organizational Structure." These contractual
arrangements may not be as effective as direct ownership in providing us with control over our VIE and its subsidiaries. If we had direct ownership of our VIE and its subsidiaries, we would be able to
exercise our rights as a shareholder to effect changes in the board of directors of our VIE and its subsidiaries, which could then effect changes, subject to any applicable fiduciary duties, at the
management level.

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We may have to incur significant cost to enforce, or may not be able to effectively enforce, the contractual arrangements with our VIE and its shareholders in the event of a
breach or non-compliance by our VIE or its shareholders.

If our VIE or any of its shareholders fails to perform its, his or her respective obligations under these contractual arrangements, we
may have to incur substantial costs and expend significant resources to enforce such arrangements. We may also rely on legal remedies under PRC laws, including seeking specific performance or
injunctive relief and claiming damages, but these remedies may not be effective. For example, provided that the then-applicable laws permit, if the shareholders of our VIE were to refuse
to transfer their equity interest in the VIE to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us,
then we may have to take legal action to compel them to fulfill their contractual obligations.

In
addition, these contractual arrangements, including the Amended and Restated Exclusive Technology Consulting and Management Service Agreement, the Amended and Restated Pledge
Agreement, the Amended and Restated Exclusive Purchase Right Contract and the related powers of attorney, are governed by PRC law and all but the powers of attorney provide for the resolution of
disputes through arbitration before the China International Economic and Trade Arbitration Center, or CIETAC, in Beijing. Accordingly, these contracts would be interpreted in accordance with PRC law
and any disputes arising from these arrangements would be resolved through arbitration before CIETAC or, in the case of disputes arising from the powers of attorney, through litigation in the PRC, in
each case in accordance with PRC legal procedures. The legal environment in the PRC may not be as developed as in some other jurisdictions, such as the United States. As a result, uncertainties
in the PRC legal system could limit our ability to enforce these contractual arrangements. Furthermore, although CIETAC may award the same type of relief to the prevailing party in an arbitration
proceeding as that granted by a
court in a civil action, CIETAC does not have the authority to enforce arbitral awards. In the event that we prevail in an arbitration proceeding before CIETAC, we may nevertheless have to apply to a
PRC court for the enforcement of the arbitral award relating to the contractual arrangements. In the event we are unable to enforce these contractual arrangements, we may not be able to exert
effective control over our affiliated entities, and our ability to conduct our business would be materially and adversely affected.

Certain shareholders of our VIE may have potential conflicts of interest with us, which may harm our business and financial condition.

Currently, our VIE's shareholders are substantially the same as the beneficial owners of our shares. Certain shareholders of our VIE
also are directors and/or employees of our company. Conflicts of interest between their dual roles may arise. We cannot assure you that when conflicts of interest arise, any or all of these
individuals will act in the best interests of our company or that conflicts of interest will be resolved in our favor. In addition, these individuals may breach or cause our VIE or its subsidiaries to
breach or refuse to renew existing contractual arrangements that allow us to effectively control our VIE and its subsidiaries and to receive economic benefits from them. We are unaware of any actual
conflicts of interest encountered by U.S.-listed public companies doing business in China with a similar corporate and ownership structure to ours. Currently, we do not have existing arrangements to
address such potential conflicts of interest between these individuals and our company. We rely on those of our VIE's shareholders who are also our directors to abide by the laws of the Cayman Islands
and China, both of which provide that directors owe a fiduciary duty to the company, which requires them to act in good faith and in the best interests of the company and not to use their positions
for personal gain. If we cannot resolve any conflicts of interest or disputes between us and the beneficial owners of our VIE, we would have to rely on legal proceedings, which could result in
disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.

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The contractual arrangements our PRC subsidiary has entered into with our VIE and its shareholders may result in adverse tax consequences to us; such arrangements may be
subject to scrutiny by the PRC tax authorities and a finding that we or our VIE and its shareholders owe additional taxes could substantially reduce our consolidated net income and the value of your
investment.

Under PRC laws and regulations, arrangements and transactions among related parties should be priced on an arm's-length basis and may
be subject to audit or challenge by PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between Xuecheng Century
and our VIE and its shareholders do not represent an arm's-length price and adjust our VIE's income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other
things, result in, for PRC
tax purposes, increased tax liabilities for our VIE. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits or pay additional taxes for prior tax years and impose late
payment fees and other penalties on our VIE and its subsidiaries for underpayment of prior taxes. Similar contractual arrangements have been used by many other overseas-listed China-based companies
and, to our knowledge, the PRC tax authorities have not imposed any material penalties on those companies to date. However, we cannot assure you that such penalties will not be imposed on us in the
future and we are not able to assess with any degree of certainty the likelihood or remoteness of regulatory authorities implementing the relevant laws and regulations in a way that would materially
and adversely affect our business. Our consolidated net income may be materially and adversely affected if our VIE's and its subsidiaries' tax liabilities increase or if our VIE or its subsidiaries
are found to be subject to additional taxes, late payment fees or other penalties.

Our VIE and its subsidiaries may be subject to significant limitations on their ability to sponsor and operate private tutoring schools or make payments to related parties
or otherwise be materially and adversely affected by changes in PRC laws and regulations.

The principal regulations governing private education in China areThe Law for Promoting Private Education
(2003)andThe Implementation Rules for the Law for Promoting Private Education (2004), or PE Implementation Rules. Under these
laws and regulations, a private school may elect to be a school that does not distribute reasonable returns or a school that distributes reasonable returns. As of December 31, 2010, 57 of our
59 schools were registered as private schools that distribute reasonable returns, and the remaining two of our schools were registered as schools that do not distribute reasonable returns.

At
the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or
upgrading of educational equipment. In the case of a private school that distributes reasonable returns, this amount may not be less than 25% of the annual net income of the schools, while in the case
of a private school that does not distribute reasonable returns, this amount should be equivalent to no less than 25% of the annual increase of net assets of the school as determined in accordance
with generally accepted accounting principles in the PRC.

All
of the private tutoring schools controlled by our VIE and its respective subsidiaries currently comply with the existing laws and regulations regarding the allocation of their
development funds. A private school that distributes reasonable returns must publicly disclose such election and additional information required under the regulations. A private school should consider
factors such as the school's tuition fees, ratio of the funds used for education-related activities to the course fees collected, admission standards and educational quality when determining the
percentage of the school's net income that would be distributed to the investors as reasonable returns. However, none of the current PRC laws and regulations provides a formula or guidelines for
determining "reasonable returns."

In
addition, none of the current PRC laws and regulations sets forth different requirements or restrictions on a private school's ability to operate its education business based on such
school's status

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as
a school that requires reasonable returns or a school that does not require reasonable returns. New laws or regulations might be adopted to:



If our VIE or any of its subsidiaries becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by our VIE or any
of its subsidiaries, which could reduce the size of our operations and materially and adversely affect our business, ability to generate revenue and the market price of our ADSs.

We currently conduct our operations in China through contractual arrangements with our VIE and its shareholders and subsidiaries. As
part of these arrangements, our VIE and its subsidiaries hold some of the assets that are important to the operation of our business. If any of these entities goes bankrupt and all or part of their
assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business,
financial condition and results of operations. If our VIE or any of its subsidiaries undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors
may claim rights to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenue and the
market price of our ADSs.

Risk Factors Relating to Doing Business in China

Our operations may be adversely affected by changes in China's political, economic and social conditions.

Currently, all of our operations are conducted in China, and all of our revenues are derived from China. Accordingly, our business,
financial condition, results of operations, prospects and certain transactions we may undertake are subject, to a significant extent, to political, economic and social developments in China.

The
PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, foreign
exchange control and allocation of resources. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government
continues to exercise significant control over China's economic growth through allocating resources, controlling the incurrence and payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies. Our results of operations and financial condition may be materially and adversely affected by a tightening
or other changes of these policies and controls.

China's
social and political conditions are also not as stable as those of the United States and other developed countries. Any sudden changes to China's political system or the
occurrence of widespread social unrest could have material adverse effects on our business and results of operations.

In
addition, while the Chinese economy has experienced significant growth in the past several decades, growth has been uneven, both geographically and among various sectors of the
economy. Demand for our services depends, in large part, on economic conditions in China. Any slowdown in China's economic growth may cause our potential customers to delay or cancel their plans to
purchase our services, which in turn could reduce our revenue.

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There are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our
Hong Kong subsidiary may not qualify to enjoy the treaty benefits.

Under the EIT Law and the EIT Implementation Rules, the profits of a foreign invested enterprise generated in 2008 and onwards which
are distributed to its immediate holding company outside the PRC will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate may be
lowered to 5% if a Hong Kong resident enterprise owns over 25% of a PRC company. Our PRC subsidiary is currently wholly-owned by our Hong Kong subsidiary. However, the 5% withholding tax rate does not
automatically apply and approvals from competent local tax authorities are required before an enterprise can enjoy any benefits under the relevant taxation treaties. Moreover, according to the Notice of the State
Administration of Taxation on Issues regarding the Administration of the Dividend Provision in Tax Treatiespromulgated on
February 20, 2009, for a tax treaty to be applicable, certain requirements must be satisfied, including: (1) the taxpayer must be the beneficial owner of the relevant dividends;
(2) for corporate recipients to enjoy the favorable tax treatment under the tax treaty as direct owners of a PRC enterprise, such corporate recipients must satisfy the direct ownership
thresholds at all times during the 12 consecutive months preceding the receipt of the dividends. On August 24, 2009, the State Administration of Taxation issued the Administrative Measures for Non-resident
Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became
effective on October 1, 2009, requiring non-resident enterprises to obtain an approval from the competent tax authority in order to enjoy the treatments under tax treaties. Further,
the State Administration of Taxation promulgated theNotice on How to Understand and Recognize the "Beneficial Owner" in Tax Treatieson
October 27, 2009, which limits the "beneficial owner" to individuals, enterprises or other organizations normally engaged in substantive operations, and set forth certain adverse factors on the
recognition of such "Beneficial Owner." Our PRC subsidiary has not yet applied for such approvals because it has not declared or paid dividends, and does not intend to declare or pay dividends. Our
PRC subsidiary will apply for such approvals when it intends to declare and pay dividends. There is no assurance that the PRC tax authorities will approve the 5% withholding tax rate on dividends
received by our subsidiary in Hong Kong from our PRC subsidiary.

Under the EIT Law, we may be classified as a "resident enterprise" of China. Such classification would likely result in unfavorable tax consequences to us and our
non-PRC shareholders.

Under the EIT Law and the EIT Implementation Rules, an enterprise established outside of the PRC with "de facto management bodies"
within the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The EIT Implementation Rules define the term "de facto management
bodies" as "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." The
State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto
Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled
offshore incorporated enterprise is located in China. However, Circular 82 applies only to offshore enterprises controlled by PRC enterprises, not
those invested in by PRC individuals, like our company. Currently there are no further detailed rules or precedents applicable to us governing the procedures and specific criteria for determining "de
facto management body" for the company of our type. If the PRC authorities were to subsequently determine, or any future regulation provides, that we should be treated as a PRC resident enterprise, we
would be subject to a 25% enterprise income tax on our global income, which will significantly increase our tax burden and could materially and adversely affect our financial condition and results
of operations.

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Therefore,
if we are regarded as a PRC resident enterprise, the amount of dividends, if any, we may pay to our shareholders and ADS holders may be decreased, although dividends
distributed from our PRC subsidiary, Xuecheng Century, to us could be exempted from the PRC dividend withholding tax, since such income is exempted under the EIT Law and the EIT Implementation Rules
to a PRC resident recipient. If we are considered a PRC resident enterprise for enterprise income tax purposes, dividends we pay with respect to our ADSs or ordinary shares may be considered income
derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC shareholders may be subject to PRC tax on gains realized on the sale or other
disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC shareholders would be able to claim the benefits of any
tax treaties between their tax residence and the PRC in the event that we are considered as a PRC resident enterprise.

The enforcement of the Labor Contract Law and other labor-related regulations in China may adversely affect our business and our results of operations.

On June 29, 2007, the National People's Congress of China enacted the Labor Contract Law, which became effective on
January 1, 2008. Compared to the laws that it replaced, the Labor Contract Law establishes more restrictions and increases costs for employers to dismiss employees under certain circumstances,
including specific provisions related to fixed-term employment contracts, non-fixed-term employment contracts, task-based employment, contract-based
employment, probation, consultation with the labor union and employee representative's council, employment without a contract, dismissal of employees, compensation upon termination and for overtime
work and collective bargaining. According to the Labor Contract Law, unless otherwise provided by law, an employer is obliged to sign a labor contract with a non-fixed term with an
employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts or if the employee has worked for the employer for ten
consecutive years. Severance pay is required if a labor contract expires without renewal because the employer refuses to renew the labor contract or provides less favorable terms for renewal. In
addition, under theRegulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more
than one year for an employer are entitled to a paid vacation ranging from five to 15 days, depending on the
number of years the employee has worked for the employer. Employees who waive such vacation time at the request of employers are entitled to compensation equal to three times their regular daily
salary for each waived vacation day. As a result of these new measures designed to enhance labor protection, our labor costs have increased and could further increase, which may adversely affect our
business and our results of operations. In addition, the PRC government in the future may enact further labor-related legislation that increases our labor costs and restricts our operations.

The PRC legal system embodies uncertainties which could limit the legal protections available to you and us.

As our main operating entities and a substantial majority of our assets are located in China, PRC laws and the PRC legal system in
general may have a significant impact on our business operations. Although China's legal system has developed over the last several decades, PRC laws, regulations and legal requirements remain
underdeveloped relative to those of the United States. Moreover, PRC laws and regulations change frequently and their interpretation and enforcement involve uncertainties. For example, the
interpretation or enforcement of PRC laws and regulations may be subject to government rules or policies, some of which are not published on a timely basis or at all. In addition, the relative
inexperience of China's judiciary in some cases may add to the uncertainty as to the outcome of litigation. These uncertainties could limit our ability to enforce our legal or contractual rights or
otherwise adversely affect our business and operations. Furthermore, due to the existence of unpublished rules and policies, and since newly issued PRC laws and regulations may have a retroactive
effect, we may not be aware of our violation of certain PRC laws, regulations, policies or rules until after the fact.

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Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

Because currently all of our revenue is denominated in RMB, restrictions on currency exchange may limit our ability to use net income
generated in RMB to fund any business activities we may have outside China in the future. The principal regulation governing foreign currency exchange in China is theForeign
Exchange Administration Rules(1996), as amended. Under these rules, RMB is freely convertible for current account items, such as trade and service-related foreign exchange
transactions and dividend distributions, but not for direct investment, or loan or investment in securities outside China unless the prior approval of China's State Administration of Foreign Exchange,
or SAFE, is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign
exchange transactions under our subsidiary's capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange
controls and the
approval of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures.

Our
VIE and its subsidiaries generate revenues in RMB. We receive substantially all of our VIE's and its subsidiaries' economic benefits in the form of service fees they pay to our PRC
subsidiary in RMB pursuant to the contractual arrangements. As we do not own any equity interest in our VIE and its subsidiaries, we do not receive any dividends or other direct distributions from
them. If and when our PRC subsidiary declares and pays dividends to Xueda Hong Kong, by virtue of its status as a wholly-foreign owned enterprise, it will be permitted under applicable regulations to
convert the RMB dividends into a foreign currency and remit to its shareholder outside of the PRC. See "Item 4. Information on the Company  Business
Overview  Regulation  Regulations on Dividend Distribution" for additional requirements for distribution of dividends by a
wholly-foreign owned enterprise. In addition, in the event that our PRC subsidiary liquidates, proceeds from the liquidation may be converted into foreign currency and distributed outside of China to
Xueda Hong Kong. The shareholders of our VIE have undertaken to distribute the proceeds from liquidation of our VIE, if any, to our PRC subsidiary. Our PRC subsidiary then may distribute such proceeds
to us after converting them into foreign currency and remit them outside of China in the form of dividends or other distributions to us. Once remitted outside of the PRC, dividends and proceeds from
liquidation paid to us will not be subject to further restrictions under PRC regulations with respect to its further transfer or use.

Other
than the above distributions by and through our PRC subsidiary expressly permitted to be made without the necessity to obtain further approvals, any direct conversion of the
RMB-denominated revenue generated by our VIE and its subsidiaries for direct investment, loan or investment in securities outside China will be subject to the limitations discussed above.
We do not anticipate the need to directly convert other RMB-denominated revenue for these purposes as we expect to rely on such permitted distributions by and through our PRC subsidiary to
meet our future cash needs. However, we cannot assure you that such a need will not arise in the future as a result of unexpected future circumstances. To the extent we need to convert and use any
RMB-denominated revenue generated by our VIE and its subsidiaries not paid to our PRC subsidiary and by our PRC subsidiary not declared and paid as dividends, the limitations discussed
above will restrict the convertibility of, and our ability to directly receive and use such revenue. As a result, our business and financial condition may be adversely affected.

We
cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange
transactions.

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A failure by our shareholders or beneficial owners who are PRC citizens or residents in China to comply with certain PRC foreign exchange regulations could restrict our
ability to distribute profits, restrict our overseas and cross-border investment activities or subject us to liability under PRC laws, which could adversely affect our business and financial
condition.

In October 2005, SAFE issued theNotice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles,or SAFE Circular 75. SAFE Circular 75 states that PRC
citizens or residents must register with the relevant local SAFE branch or central SAFE in connection with their establishment or control of an offshore entity established for the purpose of overseas
equity financing involving a roundtrip investment whereby the offshore entity acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC
citizens or residents must amend their SAFE registrations when the offshore special purpose company undergoes material changes relating to increases or decreases in investment amount, transfers or
exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees or other material events. Since May 2007, SAFE has issued guidance to its local
branches regarding the operational procedures for such registration, including the new guidance issued by SAFE in 2009, which provides more specific and stringent requirements on the registration
relating to SAFE Circular 75. The guidance imposes obligations on onshore subsidiaries of the offshore special purpose company to coordinate with and supervise the beneficial owners of the
offshore entity who are PRC citizens or residents to complete the SAFE registration process. While our beneficial owners who are known to us to be PRC residents are currently in the process of
amending their registrations under SAFE Circular 75, if any of our beneficial owners fails to comply with SAFE Circular 75, our onshore subsidiary, Xuecheng Century, is required to
report the non-compliance to the local branch of SAFE. Failure to comply with the registration procedures may also result in restrictions on the relevant onshore entity, including
restrictions on the payment of dividends and other distributions to its offshore parent or affiliate and restrictions on the capital inflow from the offshore entity, and may also subject relevant PRC
residents to penalties under the PRC foreign exchange administration regulations.

Fluctuations in the value of the RMB may have a material adverse effect on your investment.

The change in value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in
China's political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the
revised policy, which was suspended in 2008 due to the worldwide financial crisis, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. In
June 2010, the PRC government announced its intentions to again allow the RMB to fluctuate within the 2005 parameters. Since July 21, 2005, there has been an approximately 21%
appreciation of the RMB against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further
and more significant adjustment of the RMB against the U.S. dollar.

Any
significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on, our ADSs in foreign currency terms. More specifically, if we
decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the
U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we receive from our initial
public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Consequently,
appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations.

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A failure to comply with PRC regulations regarding the registration of shares and share options held by our employees who are PRC citizens may subject such employees or us
to fines and legal or administrative sanctions.

Pursuant to theImplementation Rules of the Administrative Measures on Individual Foreign
Exchange, or the Individual Foreign Exchange Rules promulgated by SAFE on January 5, 2007, and theOperating Procedures on Administration of
Foreign Exchange regarding PRC Individuals' Participation in Employee Share Incentive Plans and Employee Stock Option Plans of Overseas Listed Companiesissued by SAFE on
March 28, 2007, PRC citizens who are granted shares or share options by an overseas-listed company according to its employee share option or share incentive plan are required, through the PRC
subsidiary of such overseas-listed company or other qualified PRC agents, to file with the applicable local branch of SAFE and complete certain other procedures related to the share option or other
share incentive plan. In addition, the overseas-listed company or its PRC subsidiary or other qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank, and
open special foreign currency accounts to handle transactions relating to the share option or other share incentive plan. Under theForeign Exchange Administration
Rules(1996), as amended, the foreign exchange proceeds of domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions
to be issued by SAFE. However, the implementation rules in respect of depositing the foreign exchange proceeds abroad have not been issued by SAFE. Currently, the foreign exchange proceeds from the
sales of stock or dividends distributed by the overseas-listed company can be converted into RMB or transferred to such individuals' foreign exchange savings account after the proceeds have been
remitted back to the special foreign currency account opened at a PRC domestic bank. In the case of an exercise of the options on a non-cash basis, PRC citizens are required to remit the
proceeds to special foreign currency accounts. We and our PRC citizen employees are subject to these rules. If we or our PRC option holders fail to comply with these rules, we or our PRC option
holders may be subject to fines and legal or administrative sanctions. See "Item 4. Information on the Company  Business
Overview  Regulation  Regulations on Foreign Exchange."

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds we received from our initial
public offering, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds we received from our initial public offering, as an offshore holding company of our PRC subsidiary, we may
make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary or consolidated PRC affiliated entities are subject to PRC
regulations and approvals or registration. For example, loans by us to our PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with SAFE or its local
counterparts. In addition, loans by us to our VIE and its subsidiaries, which are domestic PRC entities must be approved by the relevant government authorities and must also be registered with SAFE or
its local counterparts. Any capital contribution to our PRC subsidiary and VIE are subject to the approvals of MOFCOM or its local counterparts. We cannot assure you that we will be able to obtain
these government registrations or approvals on a timely basis, if at all, with respect to future loans or capital contributions by us to our PRC subsidiary. If we fail to receive such registrations or
approvals, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to
fund and expand our business.

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In addition, on August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of its capital
contribution in foreign currency into RMB. The notice requires that the capital of a foreign-invested company settled in RMB and converted from foreign currencies may be used only for purposes within
the business scope stated on the business license of the company and, unless otherwise permitted by other regulations, may not be used for equity investments within the PRC. In addition, SAFE
strengthened its oversight of the flow and use of the capital of a foreign-invested company settled in RMB and converted from foreign currencies. The use of such RMB capital may not be changed without
SAFE's approval and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties, including the
substantial fines set forth in theForeign Exchange Administration Rules(1996), as amended. Furthermore, SAFE promulgated a circular on
November 19, 2010, or Circular 59, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the
manner described in the offering documents.

As
stated on its business license, Xuecheng Century's scope of business is the research, development and design of computer software and hardware, network technologies, communication
technologies and products; the provision of technology transfer, technology services, technology consulting, training in computer technologies related to these products; as well as the sale of
proprietary products. We currently expect that a substantial portion of the proceeds of our initial public offering we received will be used by Xuecheng Century to meet its working capital needs and
for general corporate expenses in connection with its business expansion through providing better support to the operations of our VIE and its subsidiaries. Specifically, Xuecheng Century will make
substantial investments to improve our operating platform and technology infrastructure. Xuecheng Century will also make significant investments in developing and offering new services and products to
our students through our VIE and
its subsidiaries to enhance our tutoring services. In addition, Xuecheng Century will enhance its services to our VIE and subsidiaries through establishing operations in selected locations where our
VIE and its subsidiaries operate their business and providing other services as needed. These uses of proceeds are for purposes within the business scope of Xuecheng Century. Meanwhile, we believe
that our VIE will have adequate cash from its operations to support its own operation and expansion. Therefore, we do not expect to transfer any significant amount of the proceeds of our initial
public offering we received to our VIE or its subsidiaries. However, to the extent we need to transfer any proceeds of our initial public offering to our VIE or its subsidiaries through our PRC
subsidiary, Circular 142 and Circular 59 may significantly limit our ability to do so. In such an event, we may have to obtain external financing for our VIE or its subsidiaries. We
cannot assure you that we will have timely access to such funding on reasonable terms, in a sufficient amount, or at all. As of December 31, 2010, we have not used proceeds of our initial
public offering.

Restrictions under PRC law on our PRC subsidiary's ability to make dividend payments and other distributions could materially and adversely affect our ability to make
investments or acquisitions, pay dividends or other distributions to you, and otherwise fund and conduct our other businesses.

We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS
holders or meet other potential future cash needs, we will rely on dividend payment and other distributions made by our PRC subsidiary. As of the date of this annual report, our PRC subsidiary has not
paid any dividend to us. Although we believe our PRC subsidiary has the ability to pay dividends to us upon our request, we do not expect to request dividends from our PRC subsidiary in the near
future because we plan to have our PRC subsidiary retain all its accumulated profits for its own business operation and expansion. PRC regulations restrict the ability of our PRC subsidiary to make
dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by our PRC subsidiary only out of its accumulated after-tax profits, if
any, determined in accordance with PRC accounting standards and regulations. Our PRC

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subsidiary
is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC accounting standards to a statutory
reserve fund until the cumulative amount in such fund reaches 50% of the company's registered capital. Our PRC subsidiary currently has a registered capital of $420,000 and is in compliance with all
applicable PRC laws and regulations relating to the allocation of statutory funds. Allocations to this statutory fund can only be used for specific purposes and are not transferable to us in the form
of loans, advances or dividends. Our PRC subsidiary was established in 2009 and did not realize any after-tax profits in 2009 and, therefore, no such allocation was required. As of
December 31, 2010, our PRC subsidiary had allocated $0.2 million to these statutory reserve funds for 2010. As a result, not all funds of our PRC subsidiary are available to us and our
access to such funds is restricted. These and any other limitations on the ability of our PRC subsidiary to transfer funds to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

We may have been required to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NYSE.

On August 8, 2006, six PRC regulatory authorities, including MOFCOM, the State Assets Supervision and Administration Commission,
the State Administration of Taxation, the State Administration of Industry and Commerce, or the SAIC, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the M&A Regulations, which became effective on September 8, 2006 and were amended on June 22, 2009. These regulations, among other things, include
provisions that purport to require that an offshore special purpose vehicle, or SPV formed for listing purposes and controlled directly or indirectly by PRC companies or individuals, must obtain the
approval of the CSRC prior to the listing and trading of such SPV's securities on an overseas stock exchange, including the case where the SPV acquires shares of or equity interests in the PRC
companies in exchange for the shares of offshore companies. The application of the M&A Regulations is subject to interpretation. On December 14, 2006, the CSRC published procedures regarding
its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC, and it would take several months to complete the approval process.

Under
the M&A Regulations, "mergers and acquisitions of domestic enterprises by foreign investors" refers to a situation where a foreign investor purchases by agreement the equity
interests of a domestic non-foreign-invested enterprise, or a domestic company, or subscribes to the increased capital of a domestic company, and thus changes the domestic company into a
foreign-invested enterprise; where a foreign investor establishes a foreign-funded enterprise, through which the foreign investor purchases by agreement the assets of a domestic enterprise and
operates its assets; or where a foreign investor purchases by agreement the assets of a domestic enterprise, and then invests such assets to establish a foreign-funded enterprise to operate
the assets.

While
the exact perimeters of the M&A Regulations remain unclear, based on the advice of our PRC counsel, because the M&A Regulations only apply to transactions involving "mergers and
acquisitions of domestic enterprises by foreign investors," we believe that (i) the M&A Regulations were not applicable to our corporate restructuring in 2009 and 2010 and (ii) CSRC
approval was not required in the context of our initial public offering in 2010, for the following reasons: (a) we established our PRC subsidiary by means of direct investment, not through
merger or acquisition of any PRC domestic companies and (b) we control our VIE and its subsidiaries through contractual arrangements, not through "mergers and acquisitions of domestic
enterprises by foreign investors" as defined under the M&A Regulations. However, we cannot assure you that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as
our PRC counsel did. If the CSRC or another PRC regulatory body subsequently determines that we should have obtained the

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CSRC's
approval for our initial public offering either by interpretation, clarification or amendment of the M&A Regulations or by any new rules, regulations or directives or in any other ways
promulgated after the issuance date of the legal opinion of our PRC counsel, we may face sanctions by the CSRC or other PRC regulatory agencies. In such an event, these regulatory agencies may impose
fines and
penalties on our operations in the PRC, limit our operations in the PRC, delay or restrict the repatriation of the proceeds from our initial public offering into the PRC or take other actions that
could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory
agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby.

The M&A Regulations established more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue
growth through acquisition in China.

The M&A Regulations established additional procedures and requirements that could make merger and acquisition activities by foreign
investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction in which
a foreign investor takes control of a PRC domestic enterprise. Complying with the requirements of the M&A Regulations in such transactions could be time-consuming, and any required
approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could adversely affect our ability to grow our business through
acquisitions in China.

Risks Relating to Our ADSs

The trading price for our ADSs may fluctuate significantly.

The market price for our ADSs has been and may continue to be subject to wide fluctuations in response to factors such as actual or
anticipated fluctuations in our quarterly operating results, changes in financial estimates by securities research analysts, changes in the economic performance or market valuations of other education
companies, announcements by us or our competitors of material acquisitions, strategic partnerships, joint ventures or capital commitments, fluctuations of exchange rates between the RMB and the
U.S. dollar, intellectual property litigation, announcements of new business initiatives by us or by our competitors, recruitment or departure of key personnel, changes in the estimates of our
financial results or changes in the recommendations of any securities analysts electing to follow our securities or the securities of our competitors, changes in the economic or political conditions
in China and the impact of global macroeconomic conditions. Volatility
in global capital markets, such as volatility caused by the recent global financial and economic crises, could also have an effect on the market price of our ADSs.

In
addition, the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the
United States may affect the volatility in the price of and trading volumes for our ADSs. In recent years, a number of PRC companies have listed their securities, or are in the process of
preparing for listing their securities, on the U.S. stock markets. Some of these companies have experienced significant volatility in the prices of their securities, including significant price
declines in connection with their initial public offerings. The trading performances of these PRC companies' securities at the time of or after their offerings may affect the overall investor
sentiment towards PRC companies listed in the United States and consequently may impact the trading performance of our ADSs. These broad market and industry factors may significantly affect the
market price and volatility of our ADSs, regardless of our actual operating performance. Any of these factors may result in large and sudden changes in the trading volume and price for
our ADSs.

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Future sales or perceived sales of our ADSs or ordinary shares by existing shareholders or option holders could cause our ADSs' price to decline.

If our existing shareholders sell, indicate an intention to sell, or are perceived to intend to sell, substantial amounts of our
ordinary shares in the public market and other legal restrictions on resale lapse, the trading price of our ADSs could decline. After the completion of our initial public offering and the investment
by WPX Investments IV Ltd., a company incorporated in the Cayman Islands and affiliated with Warburg Pincus LLC, or Warburg Pincus, in our ordinary shares, we had
138,328,640 outstanding ordinary shares, including 7,124,000 ordinary shares issued and offered by us to Warburg Pincus in connection with its investment in our ordinary shares. Of these
shares, only ADSs sold in our initial public offering are freely tradable, without restriction, in the public market. All of our outstanding shares are eligible for sale in the public market, subject
to volume limitations under Rule 144 under the Securities Act. In addition, an additional 10,115,840 ordinary shares subject to outstanding options under our share incentive plan will
become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements and Rules 144 and 701 under the Securities Act. If these additional
shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our ADSs could decline.

We may need additional capital, and the sale of additional ADSs or other equity securities would result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations, and the related covenants could restrict our operations and business activities.

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our
anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments. If our internal resources are
insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional
dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and may result in operating and financing covenants that would restrict our operations
or our ability to pay dividends. Our ability to raise additional funds in the future is subject to a variety of uncertainties, including:



We
cannot assure you that, if we need additional cash, financing will be available in amounts or on terms acceptable to us, if at all, especially in the event of a severe and prolonged
global economic recession. If we fail to raise additional funds, we may need to reduce our growth to a level that can be supported by our cash flow. Without additional capital, we may not be able to
open additional schools and learning centers, acquire necessary technologies, products or business, hire, train and retain teachers and other employees, market our programs, services and products, or
respond to competitive pressures or unanticipated capital requirements.

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Many of the corporate governance rules promulgated by the NYSE do not apply to us so long as we qualify as a foreign private issuer, and there may be significant differences
between our corporate governance practices and the corporate governance standards applicable to U.S. domestic companies listed on the NYSE.

As a foreign private issuer, we are permitted to follow corporate governance practices in accordance with Cayman Islands law in lieu of
most of the NYSE corporate governance rules in the NYSE Listed Company Manual, or the NYSE Standards. For example, the NYSE Standards require U.S. domestic issuers to have a
nominating/corporate governance committee composed entirely of independent directors. We are not subject to this requirement, and we do not intend to establish a nominating/corporate governance
committee. We believe that the composition of our board and its committees and their respective duties and responsibilities are otherwise generally responsive to the relevant NYSE Standards applicable
to U.S. domestic issuers. However, the charters for our audit and compensation committees may not address all aspects of the NYSE Standards applicable to U.S. domestic issuers. For
example, the NYSE Standards require compensation committees of U.S. domestic issuers to produce a compensation committee report annually and include such report in their annual proxy statements
or annual reports on Form 10-K. We are not subject to this requirement, and we have not addressed this in our compensation committee charter. The NYSE Standards require shareholder
approval for certain matters, such as requiring that shareholders must be given the opportunity to vote on all equity compensation plans and material revisions to those plans. We intend to comply with
the requirements of Cayman Islands law in determining whether shareholder approval is required.

We may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. holders.

Based on the nature of our business and the projected composition of our income and valuation of our assets, including goodwill, and
although it is not entirely clear how the contractual arrangements between us and our affiliated consolidated entities will be treated for
purposes of the passive foreign investment company, or PFIC, rules, we do not expect to be a PFIC for 2011 or in any future year, although there can be no assurance in this regard. If we are a PFIC,
United States Holders, as defined under "Item 10. Additional Information  Taxation Certain United States Federal Income Tax Consequences,"
of our ordinary shares or ADSs may be subject to increased tax liabilities under United States federal income tax laws and regulations and will be subject to burdensome reporting requirements.
The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will
be classified as a PFIC for United States federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average
percentage of our assets (which includes cash) by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets
will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See "Item 10. Additional
Information  Taxation  United States Federal Income Tax
Consequences  Passive Foreign Investment Company." We cannot assure you that we will not be a PFIC for 2011 or in future taxable year. As the determination of
PFIC status is based on an annual determination that cannot be made until the close of a taxable year, our U.S. counsel expresses no opinion with respect to our PFIC status.

You may not be able to participate in rights offerings and may experience dilution of your holdings in relation to any such offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement,
the depositary may not make the rights available to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under
the Securities Act with respect to all holders of ADSs, or are registered

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under
the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties and may allow the rights to lapse. We may be unable
to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to
endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as
a result.

Our results of operations may fluctuate, which makes our financial results difficult to forecast and could cause our results to fall short of expectations.

Our results of operations may fluctuate as a result of a number of factors, many of which are outside of our control. As a result,
comparing our results of operations on a period-to-period basis may not be meaningful, and you should not rely on
our past results as an indication of our future performance. Our quarterly and annual net revenues and costs and expenses as a percentage of net revenues may be significantly different from our
historical or projected rates. Our quarterly and annual net revenues and gross margins may fluctuate due to a number of factors, including:



Our
ADSs could be subject to significant price volatility should our earnings fail to meet the expectations of the investment community. Any of these events could cause the price of our
ADSs to fall.

Anti-takeover provisions in our charter documents may discourage a third party from acquiring us, which could limit our shareholders' opportunities to sell their
shares at a premium.

Our third amended and restated memorandum and articles of association include provisions that could limit the ability of others to
acquire control of us, modify our structure or cause us to engage in change-of-control transactions. For example, our board of directors will have the authority, without
further action by our shareholders, to issue preferred shares in one or more series and to fix the powers and rights of these shares, including dividend rights, conversion rights, voting rights, terms
of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares. Preferred shares could thus be issued quickly with terms calculated
to delay or prevent a change in control or make removal of management more difficult. In addition, if our board of directors issues preferred shares, the market
price of our ordinary shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. These provisions could have the effect of depriving our
shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of us in a tender offer or similar
transaction.

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you
may have less protection of your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by our third amended and restated memorandum and articles of association, as amended from time to
time, the Cayman Islands Companies Law (as amended) and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders
and the fiduciary responsibilities of our directors to us under Cayman

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Islands
law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman
Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman
Islands has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies
of corporate law than the Cayman Islands.

The
Cayman Islands courts are unlikely:



There
is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a
final and conclusive judgment in personam obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of
multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (i) such courts had proper jurisdiction
over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud;
(iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the
rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated
in the Cayman Islands, because we conduct a majority of our operations in China and because the majority of our directors and officers reside outside the United States.

We are incorporated in the Cayman Islands and conduct our operations primarily in China. A substantial majority of our assets are
located outside the United States and most of our directors and officers reside outside the United States. As a result, it may be difficult or impossible for you to bring an action
against us or against these individuals in the Cayman Islands or in China in the event that you believe your rights have been infringed under the applicable securities laws or otherwise. Even if you
are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and
officers. Unlike many jurisdictions in the United States, Cayman Islands law does not specifically provide for shareholder appraisal rights on a merger or consolidation of a company. This may
make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the offeror give you additional consideration if you believe the
consideration offered is insufficient.

Shareholders
of Cayman Islands exempted companies such as us have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of
shareholders of these companies. Our directors have discretion under our amended and restated articles of association to determine whether or not, and under what conditions, our corporate records may
be inspected by our shareholders but are not obliged to make them available to our shareholders.

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This
may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a
proxy contest.

As
a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors
or controlling shareholders than they would as public shareholders of a U.S. company.

Your ability to protect your rights as shareholders through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law.

Cayman Islands companies may not have standing to initiate a derivative action in a federal court of the United States. As a
result, your ability to protect your interests if you are harmed in a manner that would otherwise enable you to sue in a U.S. federal court may be limited to direct shareholder lawsuits.

The voting rights of holders of ADSs are limited in several significant ways by the terms of the deposit agreement.

Holders of our ADSs may only exercise their voting rights with respect to the underlying ordinary shares in accordance with the
provisions of the deposit agreement. Upon receipt of voting instructions from a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying
ordinary shares in accordance with these instructions. Under our third amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting
is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders' meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with
respect to any specific matter at the meeting. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner.
We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure
that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in
which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote, and you may lack recourse if your ordinary shares are not voted as
you requested.

The depositary of our ADSs will, except in limited circumstances, grant to us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not instruct
the depositary how to vote at shareholders' meetings, which could adversely affect your interests and the ability of our shareholders as a group to influence the management of our company.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your
ADSs at shareholders' meetings if you do not instruct the depositary how to vote, unless:



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The
effect of this discretionary proxy is that you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it
more difficult for holders of ADSs to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may not receive distributions on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you.

The depositary of our ADSs has agreed to pay you the cash dividends or other distributions it or the custodian for our ADSs receives on
our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares your ADSs represent.
However, the depositary is not responsible if it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a
holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed pursuant to an applicable exemption from
registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any government approval or registration is required for such distribution. We have no
obligation to take any other action to permit the distribution of our ADSs, ordinary shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we
make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may have a material and adverse effect on the value of
your ADSs.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs, represented by American depositary receipts, are transferable on the books of the depositary. However, the depositary may
close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons,
including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The
depositary may also close its books in emergencies and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our books or the
books of the depositary are closed, or at any time if we think or the depositary thinks it is necessary or advisable to do so in connection with the performance of its duty under the deposit
agreement, including due to any requirement of law or any government or governmental body or under any provision of the deposit agreement

We
are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC.
As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce judgments obtained in
U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not nationals or residents in the
United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or
the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any
state. In addition, it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated
upon the securities laws of the United States or any state.

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ITEM 4.    INFORMATION ON THE COMPANY

A.    History and Development of the Company

We commenced our business in September 2001 to initially operate an online tutoring portal as Beijing Wanwei Xinhua Technology
Development Co. Ltd. We changed our name to Beijing Xueda Century Education Technology Co. Ltd. in November 2004 and to Xueda Education Technology
(Beijing) Co. Ltd., or Xueda Technology, in September 2007. In March 2008, CDH Xueda Education Limited, a company incorporated in Hong Kong, and Beijing Century Hui Ce
Investment Consultancy Co., Ltd, a PRC company, subscribed for equity interest in Xueda Technology. As a result, Xueda Technology became a Sino-foreign equity joint venture
company.

From
2004 to 2006, we started developing our personalized service model, based on which we delivered personalized tutoring services and established learning centers in Beijing and a
number of other pilot cities in China. Building on our success in these pilot cities, from 2007 and 2008, we expanded our tutoring service network to more than 100 learning centers in
28 cities in China. Since 2009, we have devoted significant resources to improving our operating platform and technology infrastructure and developing new services and products while continuing
to expand into new geographic locations.

Since
its inception, Xueda Technology had been our primary operating entity, through which, along with its subsidiaries and branches, we conducted all of our operations in the PRC, until
the restructuring described below.

Restructuring

PRC laws and regulations do not expressly impose limitations or restrictions on foreign investment in the tutoring service sector in
China. However, many local government authorities have different views and understandings of the relevant rules and regulations and have adopted different practices in granting licenses and permits
for entities providing tutoring services. As a result, it became uncertain whether Xueda Technology, a Sino-foreign equity joint venture company, could obtain the requisite licenses and
permits to provide tutoring services as it expanded its business into new geographic areas. In addition, we may decide to expand our business into business areas in which foreign ownership and
investment are expressly restricted, such as on-line education services. To address the uncertainties in our business expansion to build a national tutoring service network and to minimize
regulatory risks relating to restrictions on foreign ownership and investment in business areas we may expand into in the future, we undertook a restructuring during 2009 and 2010. Under this
restructuring, we established Xueda Hong Kong, our Hong Kong holding company, and Xuecheng Century, our PRC subsidiary, and have our VIE, its subsidiaries and their schools, all of which are PRC
domestic entities, provide our tutoring services, and control them through contractual arrangements.

Xueda Hong Kong

We hold 100% of the equity interest of Xuecheng Century through our wholly-owned subsidiary, Xueda Hong Kong. Xueda Hong Kong may
qualify for the preferential PRC tax treatment for dividend payments from PRC companies to certain shareholders that are Hong Kong resident enterprises. See "Item 5. Operating and Financial
Review and Prospects  Operating Results  Taxation  Income tax" for information on
the preferential PRC tax treatment for certain Hong Kong resident enterprises. In addition, while we do not currently have plans to do so, Xueda Hong Kong would allow us to pursue future business
expansion opportunities in Hong Kong.

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Xuecheng Century

Xuecheng Century was established on August 17, 2009 with a business term of twenty years from August 17, 2009 to
August 16, 2029. Xuecheng Century does not provide any tutoring services or educational services and, therefore, is not required to have an authorized business scope that covers such services.
As stated on its business license, Xuecheng Century's scope of business is the research, development and design of computer software and hardware, network technologies, communication technologies and
products; the provision of technology transfer, technology services, technology consulting, training in computer technologies related to these products; as well as the sale of proprietary products.
Xuecheng Century provides a wide range of technology consulting and management services to our VIE and VIE's subsidiaries within this business scope.

Xueda Information

On July 13, 2009, the shareholders of Xueda Technology, by themselves or through their respective designated parties,
established Xueda Information to replace Xueda Technology as our primary operating entity. Starting from November 2009, Xueda Information and its subsidiaries began to assume substantially all
of Xueda Technology's business, assets and personnel.

Xueda
Technology has ceased its business operations as a result of the restructuring, and we are in the process of dissolving and deregistering it in order to eliminate the
administrative costs associated with maintaining such an entity. We currently anticipate that the dissolution and deregistration of Xueda Technology will be completed in 2011. For the historical
periods in which Xueda Technology and its learning centers provided tutoring services, they were reflected in the description of our business and their results of operations and financial position
were consolidated in our historical financial statements. Although Xueda Technology and the legal entities through which the businesses of its learning centers were conducted have ceased to enter into
any new business, do not currently have any operations and are in the process of dissolution and deregistration, their business, assets and personnel have been completely transferred to and assumed by
Xueda Information, and the relevant physical facilities continue to operate under Xueda Information with the same infrastructure, resources and geographical coverage as before. As a result, the
dissolution of the legal entities through which the businesses of these learning centers were conducted does not reduce the number of our learning centers, and we do not anticipate that the
dissolution and deregistration of Xueda Technology and the legal entities through which the businesses of its learning centers were conducted will have any significant effect on our business, results
of operations and financial condition.

Currently,
all of our tutoring services are provided by Xueda Information and its subsidiaries, directly or through their schools. All of our revenue is generated by our VIE, Xueda
Information, and its subsidiaries and schools, in which we do not hold any direct equity interest. The contractual
arrangements between Xueda Information and its shareholders, on the one hand, and Xuecheng Century, on the other hand, allow us to consolidate the economic benefits of our PRC operations without
foreign equity ownership in the PRC domestic entities that provide tutoring services.

As
of December 31, 2010, we operated 207 learning centers in the PRC through Xueda Information's 40 wholly-owned PRC subsidiaries and 57 training schools. In
August 2009 and July 2010, we entered into a series of contractual arrangements with Xueda Information and its shareholders, which provide us with effective control over Xueda
Information and enable us to receive substantially all of the economic benefits from Xueda Information and its subsidiaries.

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Initial Public Offering and Warburg Pincus Investment

In November 2010, we completed our initial public offering, in which we offered and sold 30,889,000 ordinary shares in
the form of ADSs, raising $136.5 million in proceeds before expenses to us.

In
conjunction with our initial public offering, WP X Investments IV Ltd., a company incorporated in the Cayman Islands and affiliated with Warburg Pincus LLC, or Warburg
Pincus, purchased from us 7,124,000 ordinary shares for an aggregate purchase price of $32.8 million and from Goodor Corporation, one of our principal shareholders, which is 100%
beneficially owned by the family trust of Mr. Rubin Li, chairman of our board of directors, 3,000,000 ordinary shares.

B.    Business Overview

Overview

We are the leading national provider of tutoring services for primary and secondary school students in China with a focus on offering
personalized tutoring services. We are the largest provider of primary and secondary school tutoring services in China in terms of revenue for the year of 2009, according to International Data
Corporation, or IDC, an independent market research firm. According to a 2010 market research report issued by IDC, or the IDC report, in 2009, our market share was the largest among primary and
secondary school tutoring service providers in China, accounting for approximately 0.42% of the highly fragmented market, in which the top five players by revenue held an aggregate of 1.6% market
share. We believe our leadership position and the fragmentation of the market provide us with significant growth opportunities. According to the IDC report, we operate the largest tutoring service
network in terms of number of cities covered as of June 30, 2010. Since opening our first learning center in 2004, we have organically built an extensive tutoring service network comprised of
207 learning centers and over 9,650 full-time service professionals, serving customers located in 53 economically developed cities across 27 of China's
31 provinces and municipalities as of December 31, 2010.

We
have established "Xueda" as a leading brand in China's tutoring sector. According to the IDC report, "Xueda" is one of only a few nationwide, highly-recognized Chinese education
brands. In 2010, we were named an "Education Institution with A Top National Brand" by Tencent.com, one of the largest and most used Internet service providers in China. In 2011, Sina.com, one of the
most visited Internet portals in China, named us one of the "2010 A-List After-School Education Institutions." We believe our strong brand helps us reach a broad customer base and has
contributed to our rapid growth.

As
a pioneer in providing personalized tutoring services in China, we strive to help students improve their academic performance and reach their potential by building on their strengths,
filling in knowledge gaps, inspiring interest in learning, cultivating good study habits and fostering self-confidence. We have developed and implemented a results-oriented,
student-centric service delivery model. Compared to the conventional, class-based tutoring, our service model features personalized tutoring services tailored to each of our students' needs and
preferences and delivered by a dedicated team of full-time service professionals primarily through one-on-one tutoring. As such, we believe we are a provider of
premium tutoring services. By helping students improve academic performance and become motivated and well-rounded learners, we have won the trust of tens of thousands of students and
parents, which has in turn helped us further enhance our brand awareness and customer loyalty.

As
a result of our strong brand and effective service model, our business has experienced rapid growth.



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We
conduct our tutoring business through our variable interest entity, or VIE, and its subsidiaries and schools located in 53 cities in China as of December 31, 2010.
Although we do not hold any equity interest in our VIE, we exercise effective control over and receive substantially all of the economic benefits from our VIE and its subsidiaries and schools through
a series of contractual arrangements with our VIE and its shareholders.

Our Services

We offer personalized tutoring services to primary and secondary school students in China. We believe that many factors affect a
student's academic performance and that our
customized tutoring service can improve our students' academic performance by, among other things, selectively targeting each student's weak areas of academic knowledge and test-taking
skills and building self-confidence.

Our Service Model

Our personalized service model consists of four main components: consultation and assessment, formulation of a customized study plan,
personalized tutoring and delivery of student-oriented supporting services. We also seek to involve the parents of our students in each of these components.

GRAPHIC

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Consultation and assessment.For each new student, we commence our services with a consultation by one of our education
consultants. During the
consultation, we discuss with the student and his or her parents the student's past and current academic performance, future academic goals, specific subject and grade level tutoring needs, and any
pertinent personal circumstances such as scheduling constraints. We also provide the student with an overview of our personalized service model and explain how we can design a study plan
tailor-made to help the student improve their academic performance and achieve their goals. A comprehensive assessment test is administered as part of the consultation session, which
consists of questions designed to evaluate the student's existing academic knowledge, test-taking skills and psychological and behavioral patterns. Our education consultants use the
results of the consultation and the assessment test to analyze the student's academic strengths and weaknesses, establish a profile of the student's study preferences and habits, and help the student
set or refine their academic objectives.

Formulation of a customized study plan.Based on a student's individual needs and their parents' input,
our education consultants, instructors and study counselors jointly craft a customized study plan specifically designed for each student. The study plan includes identifying the subject areas in which
the student needs tutoring, assembling a team of instructors who have a solid command of the relevant subject areas and whose styles of instruction are likely to be most effective for this student,
establishing a timeline to reach key milestones and developing a weekly tutoring schedule that complements the student's regular school schedule.

Personalized tutoring.Guided by the customized study plan, our instructors work with our students primarily on a one-on-one
basis to deliver personalized content, optimized exercises and customized study guidance to help student fill knowledge gaps, inspire academic interest and cultivate good learning habits. In executing
the customized study plan, our instructors seek to enhance a student's understanding of a specific academic subject, problem-solving techniques and test-taking skills through a combination
of pedagogical tools including one-one-one lectures, discussions, experiments, problem sets and tests. In addition, our instructors conduct small group tutoring in
circumstances where group interaction and peer-inspired learning are conducive to the best results.

Delivery of supporting services.Our customized tutoring services also include a comprehensive package of student-oriented
supporting services that
complements one-on-one tutoring. In addition to the education consultants who provide the initial consultation and our instructors who deliver our educational content, our
professional team also consists of study counselors, teaching assistants and psychological counselors. Each of our students is assigned to a study counselor, who tracks the student's progress and
achievements throughout his or her learning process and adjusts his or her study plan from time to time to match the student's progress. Each student also has unrestricted access to optional, free Q&A
sessions in study rooms at our learning center, where our instructors are present and available to answer questions and provide additional guidance on study material and general study methods. Our
students also have access to our team of psychological counselors, who work with our students to help relieve anxiety, maintain motivation and build self-confidence. Each of our students
also benefits from the services of our dedicated team of educational research specialists, who continually monitor the progress of our tutoring programs, develop and update tutoring and training
materials based on curricular changes and trends in students' needs, and fine-tune our service model.

We
also seek to involve the parents of our students in each component of the tutoring process. Prior to, or in conjunction with, the consultation and assessment test, we discuss with the
parents their observations of the student's academic performance, study habits and behavioral patterns to supplement the consultation and assessment test results and to formulate a more complete and
accurate profile of the student. In our customized study plan, we consult with the parents on their objectives and expectations, and encourage the parents to provide additional input to optimize the
study plan's fit given the student's and the parents' unique circumstances. During the tutoring sessions and throughout

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our
service period, we periodically communicate with the parents to provide them with updates on the progress of their children in our tutoring program and seek additional input from them regarding
any potential adjustments to the study plan. Parents also have the opportunity to interact with members of our professional team, including instructors, study counselors and teaching assistants, on an
ad-hoc basis in addition to the regularly scheduled meetings. We also host seminars on parenting skills for parents from time to time.

Our Course Offerings and Course Materials

Course Offerings.Our personalized service model enables us to respond to the unique circumstances and serve the diverse needs of our
students. We
offer a customized study plan to each of our students, tailored to fit the student's aptitude, grade level, study habits, past academic performance, future academic goals and other pertinent factors,
and assemble a team of service professionals that we deem to be best suited to effectively execute the study plan and deliver our services. Our course offerings cover all academic subjects taught in
primary and secondary schools in the markets where we operate, such as Mathematics, English, Physics, Chinese and Chemistry. We also offer self-designed courses beyond the standard
curriculum in certain subjects, as well as in subjects not usually taught at public primary and secondary schools.

Course Materials.We take a personalized approach with respect to the course materials we use in our tutoring services. For each of our
students, we
work with standard text books and course materials adopted by the school in which the student is enrolled or is expected to enroll as well as commercially available study-aids, and
supplement them with selected materials from our educational resources database that we deem to be the best fit for the student's needs and circumstances. Prior to each tutoring session, our
instructors prepare an instruction outline of the course materials to be used at that session, including key knowledge points, examples and illustrations, and questions and exercises.
In the past, we have built a sizable database that contains these outlines and other course materials and as a result, may not be able to effectively protect this database and course materials. We
have not registered our copyrights with respect to these database and course materials. We rely on trade secret laws and confidentiality agreements to protect our copyrights in these proprietary
database and course materials.

We
currently have 86 employees focused on the research and development of course content and delivery method at our headquarters. In addition, we have research and development
personnel in all of our subsidiaries to coordinate the efforts of many of our instructors who regularly participate in research and development projects. We regularly update our educational resources
database and supplement it with feedback from our instructors and students. Leveraging this consolidated educational resource database, our content research and development team develops course
materials based on students' needs and preferences.

Service Pricing and Course Fees

We charge for our services by tutoring hours and adjust the hourly rates for the students' grade levels, the number of course hours
purchased, the experience levels of the instructors and local market conditions. Historically, we have observed a certain level of inelasticity in demand for our services and have been able to
steadily raise our course fees.

We
typically price our services based on an agreed-upon number of tutoring hours over a period of three to ten months and require all of our students to pay the total course
fees in full within seven days from the date they enter into a service contract with us. In addition to course fees, each of our new students is required to pay a non-refundable
registration fee at the time such student enters into the first service contract with us. The registration fee varies from location to location and normally ranges from RMB300 ($45.5) to RMB500
($75.8). Students who are unable or unwilling to complete all

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of
the prepaid tutoring hours and wish to terminate the services may be eligible to receive a partial refund, subject to the terms of the agreement they have entered into with us that restrict refunds
under certain circumstances and depending on our practice of whether to seek enforcement of these restrictive terms.

Service Professionals

We help our students enhance their academic performance and become well-rounded learners through a combination of services
and pedagogical methods. To that end, we assemble for each of our students a team of service professionals consisting of instructors, education consultants, study counselors and psychological
counselors.

As
of December 31, 2010, our team of full-time service professionals consisted of the following:

Instructors(1)


7,575Education consultants


1,068Study counselors


1,007Psychological counselors


50


(1)Our
full-time instructors collectively delivered 84.4% of our course hours for the year ended December 31, 2010. Our contract instructors
collectively delivered 15.6% of our course hours for the same period.


These service professionals are critical to maintaining the quality of our services and to protecting and enhancing our brand
and reputation.

Our
instructors play a key role in delivering our premium, personalized tutoring services by interacting with students on a regular basis. We seek to attract and retain qualified
instructors with solid academic qualifications and teaching experience who are enthusiastic about working with students and can adapt to each of our students' unique circumstances. In particular, we
target new or recent college graduates because they are more likely to adapt to our personalized service model, bond with our students and effectively deliver personalized tutoring services than are
long-time teachers more familiar with traditional classroom settings. Over time, we have organically built up a young, energetic and well-qualified team of instructors. As of
December 31, 2010, 75.4% of our full-time instructors were under the age of 30. Based on our track record of recruiting from this demographic group, we are developing collaborative
programs with a number of teacher's colleges in China, at which we conduct early campus recruitment and provide pre-graduation training for prospective instructors.

All
of our instructors are required to undergo an initial training program when they first join us, covering tutoring skills and techniques, subject matter for relevant courses,
corporate culture and our educational philosophy. Our training includes not only teaching methods but also basic psychology lessons to help our instructors better understand our students. We also
provide ongoing pedagogical
training to our instructors to further enhance their skills and understandings of student demands, entrance exams, admissions standards and other key trends necessary to effectively render our
services. These training programs are developed with the assistance of our research and development team.

Some
of our instructors are more advanced in their teaching career. While we do not directly compete with other service providers in recruiting the limited number of star teachers from
elite schools for our team of instructors, we have attracted a team of veteran teachers with extensive experience at leading primary and secondary schools that help us monitor our tutoring programs
and participate in the training of our younger instructors.

By
drawing upon decades of experience and insights from our more experienced instructors, as well as the enthusiasm and adaptability of our younger team of instructors located throughout
the country, we are able to deliver high-quality personalized tutoring services cost-effectively and at scale.

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This
combination of a smaller team of highly experienced instructors and a larger team of younger instructors also allows us to largely avoid the intense competition for hiring start teachers from
elite schools as instructors, and enables us to primarily rely on a candidate pool where supply is far less limited.

Our
study counselors are also instrumental to our service model. Our study counselors track the students' progress and achievements and adjust study plans from time to time. They also
serve as a helpful resource to students and parents and provide them with advice on study methods and learning habits. In addition, our study counselors act as a conduit for students and parents to
provide feedback on our services. Their services distinguish us from many providers of tutoring services who do not have service professionals dedicated to similar functions.

Our
education consultants and psychological counselors round out our team of service professionals. Education consultants provide initial assessment and consultation services to
potential students; and psychological counselors help our students relieve anxiety, maintain motivation and build self-confidence. These service professionals are recruited because of
their experience and skills in the relevant areas and because they have an interest in providing personalized tutoring services.

We
are taking measures in order to maintain a healthy attrition level of our target service professionals. For example, we are in the process of enhancing our compensation schemes to
make them more competitive in the market while enhancing the efficiency and utilization of our service professionals, refining our recruitment standards, developing training programs to help our
service professionals adapt to our business and offering them better internal career development opportunities.

Our Service Network

We deliver our services to students through an extensive physical network, consisting of 207 learning centers as of
December 31, 2010, all of which are operated by us, in 53 economically developed cities in China. We select new locations based on a variety of factors, including the income level and
trend, demographics (in particular, primary and secondary school enrollment), local regulations, rules and implementations relating to after-school tutoring, as well as the presence of
competing offerings in the area. We expect to continue to open new learning centers in cities in which we currently have a presence and which exhibit strong enrollment potential. We also expect to
continue our expansion into to new geographic locations.

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All
of our learning centers are directly operated by us under our "Xueda" brand. The following table sets forth the locations of our learning centers and the number of our learning
centers at each location as of December 31, 2010.

City

Number of
Learning
Centers

City

Number of
Learning
CentersBeijing


24

Huizhou


3Shanghai


14

Jinan


3Guangzhou


12

Lanzhou


3Suzhou


9

Nanning


3Tianjin


9

Ningbo


3Shenzhen


7

Baotou


2Chengdu


6

Changzhou


2Hangzhou


6

Foshan


2Taiyuan


6

Wuxi


2Xi'an


6

Yantai


2Changchun


5

Baoding


1Hefei


5

Fushun


1Nanjing


5

Guiyang


1Changsha


4

Hohhot


1Dongguan


4

Jilin


1Fuzhou


4

Luoyang


1Kunming


4

Langfang


1Nanchang


4

Nantong


1Qingdao


4

Shaoxing


1Shenyang


4

Tangshan


1Shijiazhuang


4

Wenzhou


1Wuhan


4

Xianyang


1Zhengzhou


4

Yibin


1Chongqing


3

Yinchuan


1Dalian


3

Yuxi


1Daqing


3

Zhuzhou


1Harbin


3Total


207


Our
tutoring service network has experienced a rapid growth during the recent years. However, we did not historically developed adequate controls and procedures regarding due diligence
and screening process for opening new learning centers to cope with our rapid business expansion. In addition, there still exist significant uncertainties in local governments' practice in issuing
relevant regulatory approvals and permits, as evidenced by our experience of obtaining relevant approvals and permits for learning centers with similar facilities and other conditions in most but not
all of the cities where we operate. As a result, certain of our learning centers commenced operations without education permits or "tutoring services" or any other education related services in their
authorized business scope or prerequisite education permits. See "Item 3. Key Information Risk  Factors  Risk
Factors Relating to Our Business and Industry  Some of our learning centers may be deemed by government authorities to operate beyond their authorized business
scope, which could expose us to certain risks." We have been undertaking measures to rectify the potential non-compliance issues and strengthen our risk management relating to the lack of
relevant business scope or permits. In order to further control risks relating to potential noncompliance by our existing learning centers, we are in the process of expanding the authorized scope of
business for relevant subsidiaries and, as applicable, applying for permits for

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their
tutoring services. In addition, we are strengthening the implementation of the following controls and procedures for the establishment of new learning centers. We require our local management
teams to follow more stringent screening procedures and conduct thorough due diligence in connection with opening new learning centers. In order to identify potential noncompliance risks, the
management teams are required to further enhance communications with relevant government authorities to gauge local compliance requirements and regulatory practices. Under our reporting and assessment
system, the local management teams are required to report their findings to the senior management team at
our headquarters in a timely manner. The senior management team then makes final decisions after consulting our legal counsel and assessing all relevant potential risks and available compliance
options.

Marketing and Student Recruitment

We selectively and systematically market our services and build our brand through a number of different marketing programs. By doing
so, we intend to continue fostering a standard corporate identity across our learning centers network.

We
believe prospective students are attracted to our services due to our excellent brand name, our personalized service model and the quality of our programs. We employ the following
marketing methods to attract new students and retain existing students:

Referrals.Our student enrollments have also benefited from, and are expected to continue to benefit from, word-of-mouth
referrals by our current and former customers.

Media advertising.We advertise in a number of local newspapers, television channels and other traditional media, as well as on leading
Web portals
in China such as Baidu.com and Google.com.

Speeches and seminars.We regularly organize promotional speeches and seminars on study habits, review methods and similar topics of
interest to our
prospective customers.

Neighborhood promotions.Our marketing representatives visit schools, supermarkets, bookstores and other community locations with a
high
concentration of potential customers and distribute promotional materials such as informational brochures, flyers and magazines.

Student Enrollment and Service Period

With our premium, personalized service model, we are able to cater to a broad range of student needs and goals. Many students come to
us because they feel that they are lagging in academic performance in certain subject areas and that classroom format instruction is inadequate to help them catch up with their peers. Many other
students use our personalized services to maintain a competitive edge and continue to push ahead in subjects in which they already perform well. Some students also utilize our services primarily for
exam preparation purposes.

For
the year ended December 31, 2010, we delivered tutoring services to approximately 89,000 students. Of these students, approximately 17.4% were at the primary school
level, 43.2% were at the middle school level, and 39.4% were at the high school level. In the same year, we delivered

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approximately
7.0 million course hours. The following tables set forth the course hours delivered contributed by various geographic areas in China in 2010.

For the Year Ended December 31, 2010Geographic Area

% of Course
Hours
Delivered

Geographic Area

% of Course
Hours
DeliveredNorth China


23.9%

South China


11.9%Beijing


12.6%

Guangzhou


7.4%East China


30.1%

Northwest China


10.7%Shanghai


7.7%

Xi'an


9.0%Northeast China


8.8%

Central China


7.6%Southwest China


7.0%


Competition

We are uniquely positioned in the tutoring services market in China. We offer premium, personalized tutoring services through our
national network, consisting of 207 learning centers in 53 cities across China as of December 31, 2010, and our course offerings cover the full range of academic subjects taught
at primary and secondary schools in markets where we operate. Although we compete with many other tutoring service providers for the same customer base, currently we are the only national player in
this market to offer personalized tutoring services across a broad range of academic subjects. Our competitors include educational service providers who offer tutoring services in multiple academic
subjects in a limited number of geographic locations, such as Ambow Education Holdings Ltd. and TAL Education Group. We also compete with educational service providers who have a national
service network but only offer limited personalized tutoring services, such as New Oriental Education & Technology Group, Inc. According to the IDC report, in 2009, our
market share was the largest among primary and secondary school tutoring service providers in China, accounting for approximately 0.42% of the highly fragmented market, in which the top five players
by revenue held an aggregate of 1.6% market share.

We
believe the principal competitive factors in our market include the following:



We
believe that our primary competitive advantages are our well-known "Xueda" brand, our personalized service model, our ability to deliver personalized curriculum with
consistent, high quality across our national network of learning centers, and our team of experienced service and management professionals. However, some of our existing and potential competitors may
have more programs, services and products than we do or have more resources than we do. These competitors may be able to devote greater resources than we can to the development, promotion and sale of
their programs, services and products and respond more quickly than we can to changes in customer demands, market needs or new technologies. They also compete with us in recruiting qualified service
and management professionals and may attempt to solicit our employees. In addition, we face competition from many different organizations that focus on some of our targeted markets, which may be able
to respond more promptly to changes in student preferences in these markets.

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Regulation

We operate our business in China under a legal regime consisting of the State Council, which is the highest authority of the executive
branch of the PRC central government, and several ministries and agencies under the State Council's authority, including the MOE, the MIIT, SAIC, the Ministry of Civil Affairs, or the MCA, the MOFCOM,
the SAFE, and their respective authorized local counterparts. This section summarizes principal PRC regulations related to our business.

Regulations on Private Education

The principal regulations governing private education in China consist of theEducation Law of the
PRC, theLaw for Promoting Private Education (2003)and the PE Implementation Rules.

Education Law of the PRC

On March 18, 1995, the National People's Congress enacted theEducation Lawof
the PRC. TheEducation Lawsets forth provisions relating to the fundamental education systems of the PRC, including a school system of
pre-school education, primary education, secondary education and higher education, a system of nine-year compulsory education and a system of education certificates. The Education Lawprovides that the
government formulates plans for the development of education and establishes and operates schools and other institutions
of education. It also provides that enterprises, social organizations and individuals are generally encouraged to operate schools and other types of educational organizations in accordance with PRC
laws and regulations. Although no organization or individual may establish or operate a school or any other institution of education for profit-making purposes, investors are permitted to receive
"reasonable returns" on their investment in private schools, as described in more detail below.

The Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education

TheLaw for Promoting Private Education (2003)became effective on September 1,
2003, and the PE Implementation Rules became effective on April 1, 2004. Under these regulations, "private schools" are defined as schools established by social organizations or individuals
using non-government funds.

Under
relevant PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as "sponsors" instead of "owners" or "shareholders." The economic
substance of "sponsorship" with respect of private schools is substantially similar to that of ownership with respect to legal, regulatory and tax matters. The major differences between sponsorship
and ownership are as follows:



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Despite
the above differences between sponsorship and ownership, the sponsor of a private school has effective control over such private school under the Law for Promoting Private
Education through controlling the executive council or board of directors of such school, which is the decision-making body of the school. Through the school's decision-making body, the sponsor
exercises a broad range of powers, including (i) the appointment and dismissal of the school principal, (ii) the amendment of articles of association of the school and formulation of
rules and regulations of the school, (iii) the adoption of development plans and approval of annual work plans, (iv) raising funds for school operations and adoption of budgets and final
accounts, (v) making decisions on the size and compensation of the staff, (vi) making decisions on the division, merger or termination of the school, and (vii) making decisions on
other important matters of the school. In addition, through controlling the decision-making body, the sponsor also has the power to use and manage the properties of the school in accordance with
relevant laws and regulations.

Private
schools providing certifications, pre-school education, education for self-study aid and other academic education are subject to approval by the education
authorities, while private vocational schools are subject to approvals from the authorities in charge of labor and social welfare. A duly-approved private school will be granted a permit
for operating a private school, and must be registered with the MCA or its local counterparts as a privately-run non-enterprise institution. These regulations also provide
that, with respect to for-profit, private training centers registered at SAIC or its local counterparts, separate administration measures will be formulated by PRC State Council. However,
as
of the date of this annual report, no such administrative measures have been promulgated by PRC State Council or other competent authorities.

Under
the above regulations, private schools have the same legal status as public schools in most respects, although private schools are prohibited from providing military, police,
political and other kinds of education of a sensitive nature. Public schools that provide compulsory education are not permitted to be converted into private schools. In addition, the operation of
private schools is highly regulated. For example, tuition and fees private schools may charge their degree-seeking students are subject to approval by the governmental pricing authority and are
required to be publicly disclosed.

Private
schools are divided into three categories: private schools established with donated funds, private schools that distribute reasonable returns and private schools that do not
distribute reasonable returns. In the case of private schools that distribute "reasonable returns," sponsors of these schools may choose to seek the distribution of "reasonable returns" from the
annual net balance of the school after deduction of costs, donations received, government subsidies, if any, the reserved development fund and other expenses as required by the regulations.

A
private school that distributes "reasonable returns" to its sponsors must be permitted to do so by explicit provisions of its articles of association. The percentage of the school's
annual net balance that can be distributed as a reasonable return should be determined by the school's board of directors, taking into consideration the following factors: (i) the school's
tuition and fees, (ii) the ratio of the school's expenses used for educational activities and improvement of the educational conditions to the total tuition and fees collected; and
(iii) the admission standards and educational quality. Certain information relating to the factors discussed above is required to be publicly disclosed before the board of the school may
determine the amount of reasonable returns for distribution. Such information and the decision to distribute reasonable returns is also required to be filed with the approval authorities within
15 days of the board's decision. However, none of the current PRC laws and regulations provides a formula for or clear guidelines on determining what constitutes "reasonable returns." In

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addition,
none of the current PRC laws and regulations regulates the business operations of private schools that distribute reasonable returns any differently than those that do not.

At
the end of each fiscal year, every private school is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or
upgrade of educational equipment. In the case of a private school that distributes reasonable returns, this amount must be at least 25% of the annual net income of the school, while in the case of a
private school that does not distribute reasonable returns, this amount must be at least 25% of the annual increase in the net assets of the school, if any. Private schools that do not distribute
reasonable returns are entitled to the same preferential tax treatment as public schools, while the preferential tax treatment policies applicable to private schools that distribute reasonable returns
are formulated by the relevant PRC authorities. However, to date, no such regulations have been promulgated.

As
of December 31, 2010, 57 of our 59 schools were registered as private schools that distribute reasonable returns, and the remaining two of our schools were registered as
schools that do not distribute reasonable returns.

Regulations on Internet Information Services

Subsequent to the State Council's promulgation of theTelecom Regulations and the Internet Information Services
Administrative Measureson September 25, 2000, or the Internet Information Measures, the MIIT and other regulatory authorities formulated and implemented a number of
Internet-related regulations.

The
Internet Information Measures require that commercial Internet content providers, or ICP providers, obtain a license for Internet information services, or ICP license, from the
appropriate telecommunications regulatory authorities in order to provide any commercial Internet information services in the PRC. ICP providers are required to display their ICP license number in a
conspicuous location on their home page. In addition, the Internet Information Measures also provide that ICP providers that operate in sensitive and strategic sectors, including news, publishing,
education, health care, medicine and medical devices, must also obtain additional approvals from the relevant authorities in charge of those sectors. Under the Internet Information Measures,
non-commercial Internet information services, referring to information services generally available to the public free of charge, do not require prior approval and may be provided upon
completion of record filing with the appropriate telecommunications regulatory authorities.

In
July 2006, the MIIT posted on its website the "Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecom Services." The notice prohibits PRC ICP
providers from leasing, transferring or selling their ICP licenses or providing facilities or other resources to any foreign investors. The notice states that PRC ICP providers or their shareholders
should directly own the trademarks and domain names for websites operated by them, as well as servers and other infrastructure used to support these websites.

The
information we currently provide via Internet and the supplementary online services we plan to launch in the near future are non-commercial Internet information services.
We have completed the required record filing for such services. We do not currently conduct commercial online education business and will obtain the relevant approvals and licenses as required by
relevant PRC laws and regulations when we intend to conduct such business.

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Regulations on Information Security

The PRC government regulates Internet content in China to protect state security. Anyone who: (i) gains improper entry into a
computer or system of strategic importance; (ii) disseminates politically disruptive information; (iii) leaks state secrets; (iv) spreads false commercial information; or
(v) infringes intellectual property rights may be subject to criminal penalty.

The
Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways that, among other things, result in a leakage of state secrets or a spread of socially
destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we are subject to the jurisdiction of the local security bureaus. If an ICP license
holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

We
have been in compliance with these regulations in connection with the information provided on our corporate website.

Regulations on Dividend Distribution

ThePRC Wholly Foreign-owned Enterprise Law(1986), as amended, and the Implementing Rules of the Wholly
Foreign-owned Enterprise Law(1990), as amended, are the principal regulations governing the distribution of dividends
of wholly foreign-owned enterprises in China. Under these regulations, wholly foreign-owned enterprises, such as our PRC subsidiary, in China may, subject to the ongoing compliance with the applicable
foreign exchange regulations, distribute dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In
addition, each wholly foreign-owned enterprise in China is required to contribute at least 10% of its annual after-tax profits each year, if any, determined in accordance with PRC
accounting standards to its general reserves fund until the cumulative amount in the reserve fund reaches 50% of the enterprise's registered capital, and to set aside a certain amount of its
after-tax profits each year, if any, to fund its employee welfare fund. These reserve funds can only be used for the specified purposes and are not transferable to the company's
shareholders in the form of loans, advances, dividends or otherwise. As discussed below, under theForeign Exchange Administration Rules(1996), as
amended, RMB is freely convertible into foreign exchange for dividend distribution.

Regulations on Foreign Exchange

Under theForeign Exchange Administration Rules(1996), as amended, and various
regulations issued by SAFE and other relevant PRC government authorities, Renminbi is freely convertible only to the extent of current account items, such as trade related receipts and payments,
interest payments and dividend distributions. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local
counterpart for conversion of Renminbi from or into a foreign currency, such as US dollars, and remittance of the foreign currency into or out of the PRC.

Under
current PRC regulations, foreign-invested enterprise such as our PRC subsidiary is required to apply to SAFE for a Foreign Exchange Registration Certificate for Foreign-Invested
Enterprise. With such a certificate (which is subject to review and renewal by SAFE on an annual basis), a foreign-invested enterprise may open foreign exchange bank accounts at banks authorized to
conduct foreign exchange business by SAFE and may buy, sell and remit foreign exchange through such banks, subject to documentation and approval requirements. Foreign-invested enterprises are required
to open and maintain separate foreign exchange accounts for capital account transactions and current account transactions.

On
August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign invested company of foreign currency into Renminbi by restricting how the
converted Renminbi

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may
be used. The notice requires that Renminbi converted from the foreign currency denominated capital of a foreign-invested company may only be used for purposes within the business scope stated on
the business license of the company and may not be used for equity investments within the PRC unless specifically provided for otherwise. In addition, SAFE strengthened its oversight over the flow and
use of Renminbi converted from the foreign currency denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and such Renminbi may not
be used to repay Renminbi loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange
Administration Rules. Furthermore, SAFE promulgated a circular on November 19, 2010, or Circular 59, which tightens the
regulation over settlement of net proceeds from overseas offerings like this offering and requires that the settlement or net proceeds must be consistent with the description in the prospectus for
the offering.

We
expected that a substantial portion of the proceeds of our initial public offering will be used by our PRC subsidiary to meet its working capital needs and for general corporate
expenses in connection with its business expansion. As of December 31, 2010, we have not used the proceeds of our initial public offering. Meanwhile, we believe that our VIE will have adequate
cash from its operations to support its own operation and expansion. Therefore, we do not expect to transfer any significant amount of the proceeds of our initial public offering to our VIE or its
subsidiaries. However, to the extent we need to transfer any proceeds of our initial public offering to our VIE or its subsidiaries through our PRC subsidiary, Circular 142 may significantly
limit our ability to do so. In such an event, we may have to obtain external financing, and we cannot assure you that we will have timely access to such funding on reasonable terms, in a sufficient
amount, or at all.

SAFE Circular 75

SAFE Circular 75, issued in October 2005, states that PRC citizens or residents must register with SAFE or the relevant
local SAFE branch in connection with their establishment or control of an offshore company established for the purpose of overseas equity financing involving a roundtrip investment whereby the
offshore company acquires or controls onshore assets or equity interests held by the PRC citizens or residents. In addition, such PRC citizens or residents must amend their SAFE registrations when the
offshore special purpose company undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity
or debt investments, external guarantees, or other material events. Since May 2007, SAFE has issued guidance to its local branches regarding the operating procedures for such registration,
including a new guidance issued by SAFE in 2009, which provides more specific and stringent requirements on the registration made pursuant to SAFE Circular 75. The guidance imposes obligations
on onshore subsidiaries of an offshore special purpose company to coordinate with and supervise the beneficial owners of the offshore company who are PRC
citizens or residents to complete the SAFE registration process. If the beneficial owners fail to comply, the onshore subsidiaries are required to report the noncompliance to the local branch
of SAFE.

Our
beneficial owners who are known to us to be PRC residents are currently in the process of amending their registrations under SAFE Circular 75 with regard to our initial public
offering.

Employee Stock Option Plans

In December 2006, the People's Bank of China promulgated theAdministrative Measures on Individual
Foreign Exchange, or the Individual Foreign Exchange Regulations, setting forth the requirements for foreign exchange transactions by individuals (both PRC and
non-PRC citizens) under the current account and the capital account. In January 2007, SAFE issued theImplementation Rules for the Individual Foreign
Exchange Regulations, which, among other things, specified the approval and

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registration
requirement for certain capital account transactions such as a PRC citizen's participation in employee share ownership and share option plans of overseas listed companies.

On
March 28, 2007, SAFE promulgated theOperating Procedures on Administration of Foreign Exchange for PRC Individuals' Participation in Employee Share
Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules. Under the Share Option Rules, PRC citizens who are granted shares or
share options by an overseas-listed company according to its employee share option or share incentive plan are required, through the PRC subsidiary of such overseas-listed company or other qualified
PRC agents, to file with the applicable local branch of SAFE and complete certain other procedures related to the share option or other share incentive plan. In addition, the overseas-listed company
or its PRC subsidiary or a qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank, and open special foreign currency accounts to handle transactions relating
to the share option or other share incentive plan. Under theForeign Exchange Administration Rules(1996), as amended, the foreign exchange proceeds of
domestic entities and individuals can be remitted into China or deposited abroad, subject to the terms and conditions to be issued by SAFE. However, to date, SAFE has not issued any implementation
rules in respect of depositing the foreign exchange proceeds abroad. Currently, the foreign exchange proceeds from the sales of shares or dividends distributed by the overseas-listed company can be
converted into RMB or transferred to such individuals' foreign exchange savings account after the proceeds have been remitted back to the special foreign currency account maintained at a PRC domestic
bank. In the case of an exercise of the options on a non-cash basis, PRC citizens are required to remit the proceeds to special foreign currency accounts. Although further clarification is
required as to how the Share Option Rule will be interpreted or implemented, we believe that we and our PRC citizen employees are subject to these rules. If we and/or our PRC citizen employees fail to
comply with the
Share Option Rule, we and/or our PRC citizen employees may face sanctions imposed by SAFE or any other PRC government authorities.

Regulation on Overseas Listings

On August 8, 2006, six PRC regulatory agencies, including the CSRC, jointly promulgated the M&A Regulations. Under the M&A
Regulations, the prior approval of the CSRC is required for the overseas listing of offshore SPVs that are directly or indirectly controlled by PRC companies or individuals and used for the purpose of
listing PRC onshore interests on an overseas stock exchange.

Under
the M&A Regulations, "mergers and acquisitions of domestic enterprises by foreign investors" refers to a situation where a foreign investor purchases by agreement the equity
interests of a domestic company or subscribes to the increased capital of a domestic company, and thus changes the domestic company into a foreign-invested enterprise; or where a foreign investor
establishes a foreign-funded enterprise, and through which the foreign investor purchases by agreement the assets of a domestic company and operates its assets; or where a foreign investor purchases
by agreement the assets of a domestic company, and then invests such assets to establish a foreign-funded enterprise to operate the assets.

While
the exact perimeters of the M&A Regulations remain unclear, based on the advice of our PRC counsel, because the M&A Regulations only apply to transactions involving "mergers and
acquisitions of domestic enterprises by foreign investors," we believe that (a) the M&A Regulations are not applicable to our corporate restructuring in 2009 and 2010 and (b) CSRC
approval is not required in the context of our initial public offering, for the following reasons: (i) we established our PRC subsidiary by means of direct investment, not through merger or
acquisition of any PRC domestic companies and (ii) we control our VIE and its subsidiaries through contractual arrangements, not through "mergers and acquisitions of domestic enterprises by
foreign investors" as defined under the M&A Regulations. However, we cannot assure you that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel
did. If the CSRC or another

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PRC
regulatory body subsequently determines that we should have obtained the CSRC's approval for our initial public offering either by interpretation, clarification or amendment of the M&A Regulations
or by any new rules, regulations or directives or in any other ways promulgated after the issuance date of the legal opinion of our PRC counsel, we may face sanctions by the CSRC or other PRC
regulatory agencies. In such an event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operations in the PRC, delay or restrict the repatriation of the
proceeds from our initial public offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or
making it advisable for us, to halt our initial public offering before settlement and delivery of the ADSs offered hereby.

Regulation of the Software Industry

Policies to Encourage the Development of Software

On June 24, 2000, the State Council issuedCertain Policies to Encourage the Development of Software and
Integrated Circuit Industries, or the Policies, to encourage the development of software and integrated circuit industries in China and to enhance the ability of PRC
information technology companies to compete in the international market. The Policies facilitate the development of software and integrated circuit industries in China through various methods,
including:



Software Products Administration

On October 27, 2000, the MIIT issued and enforced theMeasures Concerning Software Products
Administrationto regulate and administer software products and facilitate the development of software industry in China. Pursuant to the Measures Concerning Software Products
Administration, all software products operated or sold in China must be duly registered with and recorded by the relevant authorities, and no entity or individual is allowed to sell or distribute any
unregistered and unrecorded

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software
products. In order to produce software products in China, a software producer is required to have:



Software
developers or producers are allowed to sell their registered and recorded software products independently or through agents, or by way of licensing. Software products developed
in China must be registered with local provincial governmental authorities in charge of information industry and subsequently filed with the taxation authority at the same level and the MIIT. Imported
software products,i.e., software developed overseas and sold or distributed into China, must be registered with the MIIT. Upon registration, the
software products will be granted registration certificates. Each registration certificate is valid for five years from the issuance date and may be renewed upon expiry. The MIIT and other relevant
authorities may carry out supervision and inspection over the development, production, operation and import/export of software products in and out of China.

On
March 5, 2009, the MIIT promulgated the new Measures Concerning Software Products Administration, or the New Measures, which became effective on April 10, 2009.
Under the New Measures, software products operated or sold in China are not required to be registered or recorded by relevant authorities, and software products developed in China (including
those developed in China on the basis of imported software) can enjoy certain favorable policies when they have been registered and recorded. The New Measures also eliminated the previous
requirements set forth above.

Software Copyright

The State Council promulgated theRegulations on the Protection of Computer Software,
or the Software Protection Regulations, on December 20, 2001, which became effective on January 1, 2002. The Software Protection Regulations were promulgated, among other things, to
protect the copyright of computer software in China. According to the Software Protection Regulations, computer software that is independently developed and attached to physical goods will be
protected. However, such protection does not apply to any ideas, mathematical concepts, processing and operation methods used in the development of software solutions. Under the Software Protection
Regulations, PRC citizens, legal persons and organizations will enjoy copyright protection for computer software that they have developed, regardless of whether the software has been published.
Foreigners or any person without a nationality will enjoy copyright protection over computer software that they have developed, as long as such computer software was first distributed in China.
Software of foreigners or any person without a nationality will enjoy copyright protection in China under these regulations in accordance with a bilateral agreement, if any, executed by and between
China and the country to which the developer is a citizen of or in which the developer resides, or in accordance with an international treaty to which China is a party. Under the Software Protection
Regulations, owners of software copyright will enjoy the rights of publication, authorship, modification, duplication, issuance, lease, transmission on the information network, translation, licensing
and transfer. Software copyright protection takes effect on the day of completion of the software's development. The protection period for software developed by legal persons and other organizations
is fifty years and ends on December 31 of the fiftieth year from the date the software solution was first published. However, the Software Protection Regulations will not protect the software
if it is not published within fifty years from the date of the completion of its

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development.
Civil remedies available under the Software Protection Regulations against copyright infringements include cessation of the infringement, elimination of the effects, apology and monetary
compensation. The copyright administrative authorities may order the infringer to stop all infringing acts, confiscate illegal gains, confiscate and destroy infringing copies, and may impose a fine on
the offender under certain circumstances.

Software Copyright Registration

On February 20, 2002, the State Copyright Administration of the PRC promulgated and enforced the Measures Concerning Registration of Computer Software
Copyright Procedures, or the Registration Procedures, to implement the Software Protection
Regulations and to facilitate the development of China's software industry. The Registration Procedures apply to the registration of software copyrights and software copyright exclusive licensing
contracts and assignment contracts. The registrant of a software copyright will either be the copyright owner or another person (a natural person, legal person or an organization) in whom the
software copyright becomes vested
through succession, assignment or inheritance. Upon registration, the registrant should be granted a registration certificate by the China Copyright Protection Center. As of the date of this annual
report, we have obtained seven registration certificates for computer software copyrights.

We
have completed the registration of the software programs developed by us in accordance with the above-stated software-related regulations and have obtained from relevant government
agencies the Software Product Certificates for these software programs.

Regulation of Domain Names

PRC laws require owners of Internet domain names to register their domain names with qualified domain name registrars approved by the
MIIT and obtain registration certificates from such registration agencies. A registered domain name owner has the exclusive right to use its domain name. Unregistered domain names may not receive
proper legal protections and may be misappropriated by unauthorized third parties.

We
have registered certain domain names, including21edu.com,xueda.com, ejiajiao.comandexueda.comin accordance with such regulations relating to Domain names and
website names.

Regulation of Copyright and Trademark Protection

China has enacted legislation governing intellectual property rights, including copyrights and trademarks. China is a signatory to the
main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade
Organization in December 2001.

Regulation of Copyright Protection

The National People's Congress amended the Copyright Law in 2001 to widen the scope of works and rights eligible for copyright
protection and to extend copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered
by the China Copyright Protection Center. In
February 2010, the National People's Congress further amended the Copyright Law to regulate the registration of pledge of copyright, which amendment came into force on
April 1, 2010.

Regulation of Trademark Protection

The PRC Trademark Law, adopted in 1982 and amended in 2001, protects the proprietary rights to registered trademarks. The Trademark
Office of the SAIC, or the Trademark Office, handles trademark

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registrations
and grants a term of ten years to registered trademarks and another ten years if requested upon expiry of the prior term. Trademark license agreements must be filed with the Trademark
Office for record. Certain trademarks and logos, including " LOGO", "Xueda," " LOGO" and " LOGO", originally registered by Xueda Education Technology (Beijing) Co., Ltd., or Xueda
Technology, our variable interest entity, and exclusively used by us before
have been transferred to our PRC subsidiary, Xuecheng Century as approved by the Trademark Office of the State Administration for Industry and Commerce in China, or the SAIC. In addition, Xuecheng
Century is in the process of applying to the Trademark Office of SAIC for the registration of certain other trademarks and logos, including " LOGO" and " LOGO", as well as "Elite Class" for our small-group tutoring programs. Furthermore, our PRC subsidiary, Xuecheng Century, is in the
process of registering utility model
and design patents with PRC Intellectual Property Bureau for certain teaching utilities it designed and developed, such as various kinds of multi-functional teaching desks.

Regulation of Employment

On June 29, 2007, the National People's Congress promulgated theEmployment Contract Law of the People's
Republic of China, or ECL, which became effective on January 1, 2008. On September 18, 2008, the State Council issued thePeople's
Republic of China Employment Contract Law Implementation Rules, or ECL Implementation Rules, which became effective on September 18, 2008, the date of issuance. The ECL
and ECL Implementation Rules require employers to enter into written contracts with their employees, restrict the use of temporary workers and aim to give employees long-term
job security.

Pursuant
to the ECL, employment contracts lawfully entered into prior to the implementation of the ECL and continuing as of the date of its implementation will continue to be valid.
Where an employment relationship was established prior to the implementation of the ECL but no written employment contract was entered into, a contract must be entered into within one month after the
ECL's implementation.

As
of December 31, 2010, December 31, 2009 and December 31, 2008, we had 12,930, 8,077 and 5,297 full-time employees, respectively, including
7,575, 4,580 and 2,645 instructors, respectively. As of December 31, 2010, we had the following full-time employees by department: 7,575 instructors,
1,007 study counselors, 1,068 education consultants, 268 in sales and marketing, and 3,012 in general and administrative functions, including 22 education research
specialists and 50 psychological counselors.

C.    Organizational Structure

We are a holding company and were incorporated in the Cayman Islands on April 24, 2009. We own 100% of the equity interests in China Xueda Corporation
Limited, a holding company incorporated in Hong Kong, or Xueda Hong Kong, which owns 100% of the equity interests in Xuecheng Century (Beijing) Information Technology Co. Ltd., a wholly
foreign owned enterprise, or Xuecheng Century or our PRC subsidiary, incorporated in the PRC by us on August 17, 2009.

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The
following chart sets forth our corporate and operational structure as of March 31, 2011.

GRAPHIC

Currently,
we conduct all of our operations in China through Xuecheng Century, our PRC subsidiary, as well as through a series of contractual arrangements with Xueda Information, our
VIE, and its shareholders. Our tutoring business is directly operated by and, as a result, all of our revenue is generated from Xueda Information and its subsidiaries, in which we do not hold any
equity interest.

We
do not have equity interests in Xueda Information or its subsidiaries; however, as a result of these contractual arrangements, we are the primary beneficiary of Xueda Information and
treat it as our variable interest entity under U.S. GAAP. Moreover, the shareholders of Xueda Information are substantially the same as the beneficial owners of our shares, and have aligned
interests in performing the contractual arrangements. Outstanding equity interests in Xueda Information are held by Rubin Li, Xin Jin, Jinbo Yao, Changyong Zhu, Qiang Deng, Yafei Wang, Chaoming Chai,
Junbo Song and Junhong Piao. Each of these individuals except for Junhong Piao is also a beneficial owner of our company's shares. Each of Messrs Li and Yao and Ms. Wang is a director of
our company; Mr. Jin is a director and an officer of our company and Mr. Deng is an officer of our company. See "Item 3.D. Risk
Factors  Risks Related to Regulation of Our Business and Our Corporate Structure  Certain shareholders of our VIE may have
potential conflict of interest with us, which may harm our business and financial condition."

We
have consolidated the financial results of Xueda Information and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. For the years ended
December 31,

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2008,
2009 and 2010, respectively, $34.1 million, $77.2 million and $154.1 million, or 100%, 100% and 100% of our total net revenues are attributable to Xueda Information and its
subsidiaries.

Exclusive Technology Consulting and Management Services Agreement.Pursuant to the Exclusive Technology Consulting and Management
Services Agreement
entered into on August 28, 2009 as amended and restated on July 28, 2010 between Xuecheng Century and Xueda Information, Xuecheng Century has the exclusive right to provide technical
consulting and management services to Xueda Information. Such services include course material research and development, employee training, technology development, transfer and consulting services,
public relation services, market development
and planning services, and other services as the parties may mutually agree from time to time. The Exclusive Technology Consulting and Management Service Agreement entitles Xuecheng Century to charge
Xueda Information annual service fees that amount to substantially all of the net income of Xueda Information before the service fees. Xuecheng Century recognized service fees in the total amount of
RMB111.4 million ($16.9 million) for the year ended December 31, 2010 in consideration for services provided to Xueda Information. This amount is still outstanding and has been
eliminated upon consolidation. This amount is currently expected to be paid by the end of 2011 by Xueda Information.

Pledge Agreement.Pursuant to the Pledge Agreement entered into on August 28, 2009, as amended and restated on December 31,
2010, among
Xuecheng Century and each of the shareholders of Xueda Information, each shareholder of Xueda Information has agreed to pledge his or her equity interest in Xueda Information to Xuecheng Century to
secure the performance of Xueda Information's obligations with respect to the fees payable under the Exclusive Technology Consulting and Management Services Agreement, and each shareholder of Xueda
Information has agreed not to transfer, pledge or otherwise create any encumbrance on his or her equity interest in Xueda Information without the prior written consent of Xuecheng Century.

Exclusive Purchase Right Agreement.Pursuant to the Exclusive Purchase Right Agreement entered into on August 28, 2009, as amended
and
restated on July 28, 2010, among Xuecheng Century, Xueda Information and its shareholders, each shareholder of Xueda Information is obligated to sell to Xuecheng Century, and Xuecheng Century
has an exclusive and irrevocable right to purchase, or cause its designated party to purchase, from such shareholder, in Xuecheng Century's sole discretion, all or part of such shareholder's equity
interest in Xueda Information when and to the extent that applicable PRC law permits Xuecheng Century to own all or part of such equity interest in Xueda Information. The purchase price to be paid by
Xuecheng Century will be the minimum amount of consideration permitted by applicable PRC law at the time when such share transfer occurs. Currently, we do not expect to exercise this purchase right in
the foreseeable future. At a time we determine suitable after considering all relevant factors including the needs of our business operations and the regulatory environment, we will exercise such
purchase right in the manner set forth in this agreement and in accordance with applicable PRC laws and regulations.

Power of Attorney.Pursuant to the power of attorney executed on August 28, 2009 by each of the shareholders of Xueda Information,
each such
shareholder irrevocably entrusted Xuecheng Century to exclusively exercise such shareholder's rights in Xueda Information, including without limitation, the power to participate in and vote at
shareholders' meetings and execute shareholders' resolutions; the power to sell, transfer, pledge or dispose of, in whole or in part, such shareholder's equity interest in Xueda Information; and the
power to nominate and appoint the legal representative, the chairperson of the board of directors, directors, executive directors, supervisors, general managers and other senior management of Xueda
Information for so long as he or she remains a shareholder of Xueda Information. The Articles of Association of Xueda Information provides that the major rights of its shareholders include the right
to review and approve the annual budget, operating strategy and investment plan, elect the members of board of directors and approve their compensation plan.

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Therefore,
through the irrevocable power of attorney arrangement, Xuecheng Century has the ability to exercise effective control over Xueda Information through shareholder votes and, through such
votes, to also control the composition of Xueda Information's board of directors. As a result of these contractual rights, we have the power to direct the activities of Xueda Information that most
significantly impact its economic performance and exercise control.

These
contractural arrangements between our PRC subsidiary and Xueda Information and its shareholders enable us to:



In
the opinion of our PRC legal counsel:



We
have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and
regulations. See "Item 3.D. Risk Factors  Risks Related to Regulation of Our Business and Our Corporate
Structure  All aspects of our business are subject to extensive regulation in China. We may not be in full compliance with these regulations, and our ability to
conduct business is highly dependent on our compliance with this regulatory framework. If the PRC government finds the agreements that establish the structure for our business operations do not comply
with applicable PRC laws and regulations, we could be subject to severe penalties."

D.    Property, Plant and Equipment

Except for one learning center in Hefei, Anhui province, we currently lease all of the properties we use to operate our business. Our headquarters are located in
Beijing, China, where we lease approximately 1,660 square meters of office space. As of December 31, 2010, we leased an aggregate of approximately 170,000 square meters of space
for our learning centers.

All
of our learning centers operate under our "Xueda" brand. A typical learning center consists of tutoring rooms, customer service operations and administrative facilities. Since 2009,
we have implemented a standardized interior design at our new learning center across the country, and we plan to renovate our existing learning centers for the standardized interior design
over time.

Item 4A.    Unresolved Staff Comments

None.

ITEM 5.    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in
conjunction with our consolidated financial statements and the related notes included

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elsewhere in this annual report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Item 3.D. Risk Factors" or in other parts of this
annual report.

A.    Operating Results

Overview

We are the leading national provider of tutoring services for primary and secondary school students in China with a focus on offering
personalized tutoring services. We derive our revenue from providing services through a results-oriented, student-centric service delivery model that features personalized tutoring. Since opening our
first learning center in 2004, we have organically built an extensive tutoring service network comprised of 207 learning centers and over 9,650 full-time service
professionals, serving customers located in 53 economically developed cities across 27 of China's provinces and municipalities as of December 31, 2010. According
to the IDC report, we are the largest provider of primary and secondary tutoring services in China in terms of revenue for the year of 2009 and we operate the largest tutoring service network number
of cities covered as of June 30, 2010.

Our
business continued to grow rapidly in the year ended December 31, 2010. In this year, we opened 76 new learning centers, bringing our total number of learning centers
to 207. In addition, we served approximate 89,000 students and delivered a total of over 7.0 million course hours during this year.

Factors Affecting Our Results of Operations

The major factors affecting our results of operation and financial condition include:



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As of December 31,2008(1)

2009(2)

2010(3)Development Stage

Number

% of
Total

Number

% of
Total

Number

% of
TotalStart-up learning centers


26


24.1


17


13.0


50


24.1Ramp-up learning centers


50


46.3


7


5.3


26


12.6Growth learning centers


26


24.1


75


57.3


24


11.6Mature learning centers


6


5.5


32


24.4


107


51.7Total


108


100.0


131


100.0


207


100.0


(1)Excluding
three learning centers we closed in 2008.(2)Excluding
one learning center we closed in 2009.(3)Excluding
one learning center we closed in 2010.




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Revenues

Our source of revenue is course fees collected from students, which is a function of course hours delivered in the period and the
average hourly course fee. We offer tutoring programs that cover all academic curriculum subjects taught in primary and secondary schools in the markets where we operate. Our tutoring programs
typically range in term from three to ten months. The table below sets forth our net revenue, total course hours delivered and other correlated data for the periods indicated.

For the Year Ended December 312008

2009

2010Net revenue (in thousands of $)


34,106


77,188


154,144Total course hours delivered (in thousands)


1,845


3,907


7,043Number of students served


27,139


54,130


88,761Number of learning centers (at period end)


108


131


207Average hourly course fee (in $)(1)


20


21


23


(1)Represents
gross revenue which is computed as net revenues plus business tax, divided by the total course hours delivered in the relevant period.


Cost of Revenue and Operating Expenses

Our costs and expenses consist of cost of revenue, general and administrative expenses and selling and marketing expenses.

For the Year Ended December 31,2008

2009

2010$

% of Net
Revenue

$

% of Net
Revenue

$

% of Net
Revenue(in thousands, except percentages)Cost of revenue:Teaching staff cost


21,273


62.4


43,592


56.5


77,471


50.3Rental


7,232


21.2


10,050


13.0


15,932


10.3Depreciation and amortization


447


1.3


778


1.0


3,078


2.0Other


2,993


8.8


2,906


3.8


7,023


4.5Total cost of revenue


31,945


93.7


57,326


74.3


103,504


67.1Operating expenses:General and administrative expenses


6,871


20.2


9,912


12.8


23,790


15.4Selling and marketing expenses


7,271


21.3


10,624


13.8


16,179


10.5Total operating expenses


14,142


41.5


20,536


26.6


39,969


25.9


Cost of revenue.Our cost of revenue primarily consists of:



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We
expect our total cost of revenue to increase in absolute amounts as we continue to open new learning centers, expand the capacity of our existing learning centers and hire additional
instructors, study counselors and education consultants. However, we expect our cost of revenue to decrease over time as a percentage of our net revenue as an increasing number of learning centers
become growth and mature learning centers and we enhance the utilization of both our instructors and our physical premises and facilities, enhance operating efficiency by applying standardized
operation procedures and achieve economies of scale.

General and administrative expenses.Our general and administrative expenses primarily consist of (i) compensation and
benefits of management
team, administrative staff and employees in the information technology function, including share-based compensation expenses, (ii) rental expenses for office space leased for administrative
uses, (iii) office administration, human resources management and professional service fees and (iv) to a lesser degree, depreciation and amortization of property and equipment,
including purchased software, used in our general and administrative activities. We expect that our general and administrative expenses will increase in absolute amounts in the near term as we hire
additional personnel and incur additional costs in connection with business expansion and with being a publicly traded company, including costs of enhancing our internal controls, but will decrease as
a percentage of total net revenue as we further improve operating efficiency and achieve economies of scale.

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Selling and marketing expenses.Our selling and marketing expenses primarily consist of (i) expenses relating to advertising,
 marketing and
brand promotion activities and (ii) salaries and commissions paid to our marketing personnel. We expect that our selling and marketing expenses will continue to increase in absolute amounts as
we continue our brand building and marketing activities, increase the number of our learning centers and expand into new geographic areas, but will decrease gradually to reach and remain at a stable
percentage of total net revenue due to the cumulative effect of our brand-building, advertising and marketing efforts.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains
tax in the Cayman Islands. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.

Hong Kong

Xueda Hong Kong is subject to a corporate income tax of 16.5% on the estimated assessable profit derived from its Hong Kong operation.
Xueda Hong Kong was incorporated in 2009 and had no assessable profits during the years ended December 31, 2010 and accordingly we have made no provision for its income tax.

PRC

Business tax.Currently, the learning centers we operate in China are subject to a 3% to 5% business tax on gross revenue
generated from providing
tutoring services, plus related surcharges.

Income tax.Pursuant to the EIT Law, which became effective on January 1, 2008, a uniform 25% enterprise income tax rate is
generally applied
to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. Our PRC subsidiary and our VIE and its subsidiaries in China are subject to enterprise
income tax at a statutory rate of 25%. Xueda Technology obtained the certificate of "high and new technology enterprise" in 2009 and was entitled to a preferential enterprise income tax rate of 15%.
This preferential tax treatment will end when Xueda Technology is dissolved in the near future. Accordingly, we provided full allowance for deferred tax assets related to Xueda Technology as of
December 31, 2009 and as of December 31, 2010, and the related deferred tax assets as well as the allowance were entirely eliminated. Xuecheng Century was certified as a "software
enterprise" for tax purposes in April 2010 and as a result is eligible for a
two-year exemption of income tax from 2010, followed by a 12.5% income tax rate for another three years. In part as a consequence of this preferential tax treatment, the effective tax rate
2010 was 8.8%. We expect the effective tax rates for 2011 to remain at a similar level.

Income
tax is assessed and paid at subsidiary or branch level; therefore, the net loss from operations generated by a particular entity cannot be transferred to or utilized by other
entities within our consolidated company.

Under
the EIT Law and the EIT Implementation Rules, an enterprise established outside of the PRC with "de factomanagement bodies" within
the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The EIT Implementation Rules define the term "de facto management bodies"
as "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." We do not
believe we are a resident enterprise. However, it remains unclear how PRC tax authorities will determine the tax residency status of companies like us. See "Item 3. Key
Information  Risk Factors  Risk Factors Relating to Doing Business in China 

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Under
the EIT Law, we may be classified as a 'resident enterprise' of China. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders."
Under the EIT Law and the EIT Implementation Rules, the profits of a foreign invested enterprise generated in 2008 and onwards which are distributed to its immediate holding company outside the PRC
will be subject to a withholding tax rate of 10%. Pursuant to a special arrangement between Hong Kong and the PRC, such rate is lowered to 5% if a Hong Kong resident enterprise owns over 25% of a PRC
company during the 12 consecutive months preceding the receipt of the dividends. Our PRC subsidiary is currently wholly owned by a Hong Kong subsidiary. However, there is no assurance the PRC
tax authorities will grant approvals on the 5% withholding tax rate on dividends received by our subsidiary in Hong Kong from our PRC subsidiary. See "Item 3. Key
Information  Risk Factors  Risk Factors Relating to Doing Business in China  There
are significant uncertainties under the EIT Law relating to the withholding tax liabilities of our PRC subsidiary, and dividends payable by our PRC subsidiary to our Hong Kong subsidiary may not
qualify to enjoy the treaty benefits."

Critical Accounting Policies

We prepare our financial statements in accordance with U.S. GAAP, which requires us to make estimates and assumptions that
affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and net revenues and expenses. We continually evaluate these estimates and assumptions based on
the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Our management
has discussed the development, selection and disclosure of these estimates with our board of directors. Since our financial reporting process inherently relies on the use of estimates and assumptions,
actual results may differ from these estimates under different assumptions or conditions.

An
accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate
is made, and if different estimates that could reasonably have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the
consolidated financial statements. We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because they involve the greatest
reliance on our management's judgment. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and
other disclosures included with this annual report.

Revenue Recognition

We derive our revenues from personalized tutoring services and through collecting registration fees and course fees from
our students.

We
charge each new student a non-refundable registration fee ranging from RMB300 ($45.5) to RMB500 ($75.8) primarily for the consultation and assessment we provide to the
student and design of a personalized study plan. We believe that the registration fee is, in substance, an advance payment for future tutoring services, and accordingly recognized over the estimated
customer relationship period. The customer relationship period is estimated based on our historical data with respect to service period. The customer relationship period is currently determined to be
15 months and is subject to annual assessment or when an event or other changes indicate the estimate is no longer reasonable.

Course
fees for tutoring services are generally collected within seven days after the service contract is signed and recognized proportionately as the tutoring services are delivered.
For unused prepaid course hours, students may apply for a 40-day extension within 30 days prior to the expiration date of the service contract. Under the applicable PRC laws and
regulations, students are entitled to refund of unused prepaid course fees within two years after the service contract expires. We therefore estimate

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the
refund period to be 26 months, which include the 30-day application period, the 40-day extension period and the two years by law. Deferred revenue relating to unused
prepaid course hours of expired contracts is recognized as of the end of the refund period.

Fair Value of Ordinary Shares

Before the completion of our initial public offering in November 2010, we were a private company with no quoted market prices
for our ordinary shares. We had therefore needed to make estimates of the fair value of our ordinary shares at various dates for the following purposes:



Following
our initial public offering, the fair value of our ordinary shares is determined by reference to the trading prices of our ADSs on the New York Stock Exchange.

The
following table sets forth the fair value of our ordinary share estimated at different times before the completion of our initial public offering.

Date

Class of Shares

Fair Value

Purpose of ValuationMarch 26, 2008

Ordinary Shares

$
0.06

Assessment of beneficial conversion feature upon issuance of Series A1 and Series A2 preferred sharesAugust 29, 2009

Ordinary Shares

$
0.63

Assessment of beneficial conversion feature upon issuance of Series A1 preferred sharesMarch 16, 2010

Ordinary Shares

$
1.89

Valuation of share based compensation


When estimating the fair value of our ordinary shares, our management considered a number of factors, including the result of valuation by Marsh
Valuation Services Practice, or Marsh, an independent third party appraisal firm, and equity transactions of our company, while taking into account standard valuation methods and the achievement of
certain events.

The
valuation reports issued by Marsh were used as part of our analysis in reaching our conclusion on the fair value of our ordinary shares. We reviewed the valuation methodologies used
by Marsh and believe the methodologies used are appropriate and the valuation results were representative of the fair value of our ordinary shares.

Marsh
used the discounted cash flow, or DCF, method of the income approach to derive the fair value of our ordinary shares in 2008, 2009 and 2010. We considered the market approach and
searched for public companies located in China with business nature and in a development stage similar to ours. However, no companies were similar to us in all aspects, and we therefore only used the
results obtained from the market approach to assess the reasonableness of the results obtained from the income approach. The determination of the fair value of our ordinary shares requires complex and
subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time
of valuation.

The
major assumptions used in calculating the fair value of ordinary shares include:



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The
income approach involved applying appropriate discount rates to estimated cash flows that were based on earnings forecasts. Our revenue and earnings growth rates, as well as major
milestones that we had achieved, contributed significantly to the increase in the fair value of our ordinary shares from March 2008 to March 2010. The assumptions used in deriving the
fair values were consistent with our business plan. However, these assumptions were inherently uncertain and highly subjective. The risk associated with achieving our forecasts were assessed in
selecting the appropriate discount rates, which ranged from 29% to 24%.

Marsh
used the option-pricing method to allocate enterprise value to preferred and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice
Aid, "Valuation of Privately-Held-Company Equity Securities Issued as Compensation," or the Practice Aid. The method treats
ordinary shares and preferred shares as call options on the enterprise's value, with exercise prices based on the liquidation preference of the preferred shares.

The
option-pricing method involved making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates
of the volatility of our equity securities. The anticipated timing was based on the plans of our board of directors and management. Estimating the volatility of the share price of a privately held
company was complex because there was no readily available market for the shares. We estimated the volatility of our shares to range from 44% to 57% based on the historical volatilities of comparable
publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, the allocations between preferred and ordinary shares would have been different.

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The
determined fair value of our ordinary shares increased from $0.06 per share as of March 26, 2008 to $0.63 per share as of August 29, 2009. We believed the increase in
the fair value of ordinary shares in this period was primarily attributable to the following factors:



The
determined fair value of our ordinary shares increased from $0.63 per share as of August 29, 2009 to $1.89 per share as of March 16, 2010. We believed the increase in
the fair value of ordinary shares over the period was primarily attributable to the following factors:



The
valuation of our ordinary shares as of March 16, 2010 was based on assumptions that reflected the enhanced visibility of our full year 2010 performance as the result of
improved financial and operating performance for the first quarter of 2010, which was, to a certain extent, known to the management as of March 16, 2010. More specifically, our assumptions were
based on the following factors:





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We
have considered the guidance prescribed by the Practice Aid in determining the fair value of our ordinary shares as of various dates before our initial public offering. A detailed
description of the valuation method used and the factors contributing to the changes in the fair value of our ordinary shares through March 16, 2010 was set out above. Paragraph 113 of
the Practice Aid states that "the ultimate IPO price itself also is generally not likely to be a reasonable estimate of the fair value for pre-IPO equity transactions of the enterprise."
We, therefore, believed the ultimate price of our initial public offering would generally not likely to be a reasonable estimate of the fair value of our ordinary shares as of various dates before our
initial public offering.

Nevertheless,
we believed that the increase in fair value of our ordinary shares from $1.89 per ordinary share as of March 16, 2010 to $4.75 per ordinary share, the initial public
offering price shown on the front cover of the prospectus for the offering divided by the number of ordinary shares represented by each ADS, was primarily attributable to the following
factors:



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Share-based Compensation

Our share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument we issued
and recognized as a compensation expense over the requisite service period based on a graded vesting schedule, with a corresponding impact reflected in additional paid-in capital.

The
fair values of our option awards were estimated on the date of grant using the binomial option pricing model using the following assumptions:

For Options Granted on March 16, 2010

AssumptionRisk-free interest rate


4.36%Expected dividend yield


0%Expected volatility


54.1%Exercise price

$
0.99 per shareFair value of the underlying ordinary shares

$
1.89 per shareTerm


10 years


The
risk-free rate is based on the implied yield of China International Bond denominated in U.S. dollars with maturity similar to the expected life of the option as of
the valuation date. As we expected to grow the business with internally generated cash, we did not expect to pay dividends in the foreseeable future. Because we do not maintain an internal market for
our ordinary shares, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar businesses.

In
determining the fair value of the share options granted on March 16, 2010, we used the fair value of our ordinary shares as determined through a retrospective valuation by an
independent appraiser. For more information, see " Fair Value of Ordinary Shares."

On
February 25, 2011, we granted 290,000 non-vested shares to employees. The fair value of the nonvested shares was estimated based on the market closing price
of our ADSs on the New York Stock Exchange as of the grant date.

Share-based
compensation expense, based on the estimated fair value of share awards granted and the estimated forfeiture rate of 25%, will be recorded over vesting periods after the
grant date on a straight-line basis with the amount of compensation expenses recognized in any period not less than the portion of the grant date fair value of the share awards vested
during that period.

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The
estimate of forfeiture rate is reviewed and adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimate.
Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a certain period, we must include an expense within the tax provision in the statement of operations.

Significant
management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In
the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our
financial position and results of operations.

The
impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income
taxes will be classified as a component of the provisions for income taxes. We have concluded that there were no significant uncertain tax positions requiring recognition in financial statements for
the years ended December 31, 2008 and 2009. We did not incur any interest and penalties related to potential underpaid income tax expenses and also do not anticipate any significant increases
or decreases in unrecognized tax benefits in the next 12 months. The years 2008 to 2009 remain subject to examination by the PRC tax authorities.

Results of Operations

The following table sets forth a summary of our consolidated results of operations and selected operating data for the periods
indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The

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results
of operations in any period are not necessarily indicative of the results that may be expected for any future period.

For the Year Ended December 31,2008

2009

2010$

% of Net
Revenue

$

% of Net
Revenue

$

% of Net
Revenue(in thousands, except percentages)Net revenue


34,106


100.0


77,188


100.0


154,144


100.0Cost of revenue:Teaching staff cost


(21,273
)

(62.4
)

(43,592
)

(56.5
)

(77,471
)

(50.3
)Rental


(7,232
)

(21.2
)

(10,050
)

(13.0
)

(15,932
)

(10.3
)Depreciation and amortization


(447
)

(1.3
)

(778
)

(1.0
)

(3,078
)

(2.0
)Other


(2,993
)

(8.8
)

(2,906
)

(3.8
)

(7,023
)

(4.5
)Total cost of revenue


(31,945
)

(93.7
)

(57,326
)

(74.3
)

(103,504
)

(67.1
)Gross profit


2,161


6.3


19,862


25.7


50,640


32.9Operating expenses:General and administrative expenses


(6,871
)

(20.2
)

(9,912
)

(12.8
)

(23,790
)

(15.4
)Selling and marketing expenses


(7,271
)

(21.3
)

(10,624
)

(13.8
)

(16,179
)

(10.5
)Total operating expenses


(14,142
)

(41.5
)

(20,536
)

(26.6
)

(39,969
)

(25.9
)Government subsidies


52


0.2


83


0.1


26


0.0Other income














76


0.0(Loss)/income from operations


(11,929
)

(35.0
)

(591
)

(0.8
)

10,773


7.0Interest income


24


0.1


220


0.3


510


0.3(Loss)/income before income tax expenses


(11,905
)

(34.9
)

(371
)

(0.5
)

11,283


7.3Income tax expensesCurrent


(547
)

(1.6
)

(1,320
)

(1.7
)

(3,455
)

(2.2
)Deferred








83


0.1


2,465


1.6Total income tax expenses


(547
)

(1.6
)

(1,237
)

(1.6
)

(990
)

(0.6
)Net (loss)/income


(12,452
)

(36.5
)

(1,608
)

(2.1
)

10,293


6.7




Selected Operating Data:

2008

2009

2010Course hours delivered (in thousands)


1,845


3,907


7,043Number of learning centers (at period end)


108


131


207Number of students served


27,139


54,130


88,761Average hourly course fee (in $)(1)


20


21


23Number of teaching staff members (at period end)


3,695


6,021


9,650


(1)Represents
gross revenue, which is computed as net revenue plus business tax, divided by the total course hours delivered in the relevant period.


Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net revenue.Our total net revenue increased by 99.7% to $154.1 million for the year ended December 31, 2010 from
$77.2 million
for the year ended December 31, 2009. $63.1 million, or 82.0%, of the increase in net revenue was contributed by the increase in course hours delivered and the other
$13.8 million, or 18.0%, of the increase was contributed by the increase in the average hourly course fee from the year ended December 31, 2009 to the year ended December 31,
2010. Course hours delivered increased significantly from approximately 3.9 million hours for the year ended December 31, 2009 to approximately 7.0 million hours for the year
ended December 31, 2010, primarily attributable

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to
the increases in the total number of learning centers as well as in the number of growth and mature learning centers, which also significantly contributed to the increase in the number of students
served from approximately 54,100 for the year ended December 31, 2009 to approximately 89,000 for the year ended December 31, 2010. The number of our learning centers in
operation increased from 131 as of December 31, 2009 to 207 as of December 31, 2010. The number of growth and mature learning centers increased from 107 as of
December 31, 2009 to 131 as of December 31, 2010. In addition, the increase in net revenue for the year ended December 31, 2010 was attributable to the increase in our
average hourly course fee from $21 for the year ended December 31, 2009 to $23 for the year ended December 31, 2010.

Cost of revenue.Our cost of revenue increased by 80.6% to $103.5 million for the year ended December 31, 2010 from
$57.3 million for the year ended December 31, 2009, which increase was at a significantly lower rate compared to the increase in our net revenue. This increase was primarily due to
(i) the significant increase in teaching staff cost from $43.6 million for the year ended December 31, 2009 to $77.5 million for the year ended December 31, 2010 as
our full-time instructors, study counselors and education consultants increased by 60.3% from December 31, 2009 to December 31, 2010 and performance-based teaching fees and
bonuses also increased significantly as the result of increased course hours delivered, and (ii) a 58.5% increase in rental cost from $10.1 million for the year ended December 31,
2009 to $15.9 million for the year ended December 31, 2010 as we leased premises for the 76 new learning centers opened in 2010. Cost of revenue as a percentage to net revenue
decreased to 67.1% for the year ended December 31, 2010 from 74.3% for the year ended December 31, 2009.

Gross profit.Our gross profit increased significantly to $50.6 million for the year ended December 31,
2010 from $19.9 million for the year ended December 31, 2009. Gross margin also increased to 32.9% for the year ended December 31, 2010 from 25.7% for the year ended
December 31, 2009. The increases in gross profit and gross margin were primarily because a significant number of learning centers operating in 2008 became mature learning centers in 2010,
resulting in enhanced utilization of our facilities and teaching staff. As of December 31, 2009, only 32, or 24.4%, of our learning centers were mature learning centers. By comparison, as of
December 31, 2010, 107, or 51.7%, of our learning centers were mature learning centers.

Operating expenses.Our total operating expenses increased by 94.6% to $40.0 million for the year ended December 31,
2010 from
$20.5 million for the year ended December 31, 2009. Operating expenses as a percentage of net revenue decreased to 25.9% for the year ended December 31, 2010 from 26.6% for the
year ended December 31, 2009, primarily attributable to our implementation of monthly budget control for the general and administrative expenses and selling and marketing expenses.



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Government subsidies.We received approximately $26 thousand and approximately $83 thousand of cash in government
subsidies for the
year ended December 31, 2010 and 2009, respectively, from local government authorities in a district in Shanghai to encourage our business development in that district. There is no limitation
on the use of the subsidies and the receipt of such subsidies does not subject us to any additional governmental regulations or future obligations. Government subsidies have been granted based on
local business incentive policies and may not be received in the future.

Income from operations.Our income from operations increased significantly to $10.8 million for the year ended
December 31, 2010 from a
loss of $0.6 million for the year ended December 31, 2009.

Income tax expenses.Our income tax expenses decreased to $1.0 million for the year ended December 31, 2010 from
$1.2 million
for the year ended December 31, 2009, primarily due to the tax exemption enjoyed by Xuecheng Century.

Net income.As a result of the foregoing, we generated net income of $10.3 million for the year ended December 31,
2010 and net loss of
$1.6 million for the year ended December 31, 2009.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net revenue.Our total net revenue increased significantly to $77.2 million for the year ended December 31, 2009 from
$34.1 million for the year ended December 31, 2008. $39.1 million, or 90.7%, of the total increase in net revenue was contributed by the increase in course hours delivered and the
other $4.0 million, or 9.3%, of the increase was contributed by the increase in the average hourly course fee from 2008 to 2009. Course hours delivered increased significantly from
approximately 1.8 million hours for the year ended December 31, 2008 to approximately 3.9 million hours for the year ended December 31, 2009, primarily attributable to the
increases in the total number of learning centers as well as in the number of growth and mature learning centers, which also significantly contributed to the increase in the number of students served
from approximately 27,100 for the year ended December 31,
2008 to approximately 54,100 for the year ended December 31, 2009. The number of our learning centers in operation increased from 108 as of December 31, 2008 to
131 as of December 31, 2009. The number of growth and mature learning centers increased from 32 as of December 31, 2008 to 107 as of December 2009. In
addition, the increase in net revenue for the year ended December 31, 2009 was attributable to the increase in our average hourly course fee from $20 for the year ended December 31, 2008
to $21 for the year ended December 31, 2009.

Cost of revenue.Our cost of revenue increased by 79.5% to $57.3 million for the year ended December 31, 2009 from
$31.9 million
for the year ended December 31, 2008, which increase was at a significantly lower rate compared to the increase in our net revenue. This increase was primarily due to (i) the significant
increase in teaching staff cost from $21.3 million for the year ended December 31, 2008 to $43.6 million for the year ended December 31, 2009 as our full-time
instructors, study counselors and education consultants increased by 2,386 in 2009 and performance-based teaching fees and bonuses also increased significantly as the result of increased course
hours delivered, and (ii) a 39.0% increase in rental cost from $7.2 million for the year ended December 31, 2008 to $10.1 million for the year ended December 31,
2009 as we leased premises for the 23 new learning centers opened in 2009. Cost of revenue as a percentage to net revenue decreased to 74.3% for the year ended December 31, 2009 from
93.7% for the year ended December 31, 2008.

Gross profit.Our gross profit increased significantly to $19.9 million for the year ended December 31, 2009 from
$2.2 million
for the year ended December 31, 2008. Gross margin also

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increased
significantly to 25.7% for the year ended December 31, 2009 from 6.3% for the year ended December 31, 2008. The significant increases in gross profit and gross margin were
primarily because a significant number of learning centers operating in 2008 became growth and mature learning centers in 2009, resulting in enhanced utilization of our facilities and teaching staff.
As of December 31, 2008, only 32, or 29.6%, of our learning centers were growth and mature learning centers. By comparison, as of December 31, 2009, 107, or 81.7%, of our learning
centers were growth and mature learning centers.

Operating expenses.Our total operating expenses increased by 45.2% to $20.5 million for the year ended December 31,
2009 from
$14.1 million for the year ended December 31, 2008, which increase was at a significantly lower rate compared to the increase in our net revenue. Operating expenses as a percentage of
net revenue decreased to 26.6% for the year ended December 31, 2009 from 41.4% for the year ended December 31, 2008, primarily attributable to improved operating efficiency, increased
number of growth and mature learning centers and increased brand recognition as a result of our brand-building, advertising and marketing efforts.



Government subsidies.We received $52 thousand and $83 thousand of cash in government subsidies for the years ended
December 31,
2008 and 2009, respectively, from local government authorities in a district in Shanghai to encourage our business development in that district. There is no limitation on the use of the subsidies and
the receipt of such subsidies does not subject us to any additional governmental regulations or future obligations. Government subsidies have been granted based on local business incentive policies
and may not be received in the future.

Loss from operations.Our loss from operations decreased by 95.0% to $0.6 million for the year ended December 31, 2009
from
$11.9 million for the year ended December 31, 2008.

Income tax expenses.Our income tax expenses increased significantly to $1.2 million for the year ended December 31,
2009 from
$0.5 million for the year ended December 31, 2008, primarily due to the increase in taxable income from an increasing number of profitable learning centers.

Net loss.As a result of the foregoing, we had a net loss of $1.6 million for the year ended December 31, 2009 and a
net loss of
$12.5 million for the year ended December 31, 2008.

Liquidity and Capital Resources

Our principal source of liquidity has been cash generated from operating activities and from issuance and sale of our Series A1 and
Series A2 preferred shares, as well as from proceeds of our

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initial
public offering and the investment by Warburg Pincus. We received course fee in cash of $57.7 million, $118.7 and $206.9 million in the years ended December 31, 2008,
2009, and 2010 respectively. We currently do not have any bank loans, nor did we have any bank loans in 2008, 2009 or 2010. As of December 31, 2010, we had $211.4 million in cash and
cash equivalents. Our cash and cash equivalents consist of cash on hand and demand bank deposit or liquid investments that are placed with banks and other financial institutions and are unrestricted
as to withdrawal or use or have maturities of three months or less. Although we consolidate the results of the learning centers controlled by Xueda Information, our VIE, our access to the cash and
cash equivalents and future earnings of these leaning centers is indirect through dividends we receive from Xuecheng Century. Xuecheng Century, in turn, receives capital resources from Xueda
Information in the form of a "consulting and technical service fee" pursuant to the Amended and Restated Exclusive Technology Consulting and Management Service Agreement.

We
have not encountered any difficulties in meeting our cash obligations to date. When considering our liquidity position and our future capital resources and needs, we take into account
the economic benefits we are entitled to receive from our subsidiary and our VIE attributable to the economic benefits we may receive from our VIE and its subsidiaries under the contractual
arrangements with our VIE. As of the date of this annual report, our PRC subsidiary has not paid any dividend to us. Although we believe our PRC subsidiary has the ability to pay dividends to us, we
do not expect dividends from our PRC subsidiary in the near future because we plan to have our PRC subsidiary retain all its accumulated profits for its own business operation and expansion.

In
addition, as the result of the restrictions under PRC law on our PRC subsidiary's ability to make dividend payments and other distributions to us, not all funds of our PRC subsidiary
are available to us and our access to such funds is restricted. See "Item 3. Key Information  Risk Factors  Risk
Factors  Restrictions under PRC law on our PRC subsidiary's ability to make dividend payments and other distributions could materially and adversely affect our
ability to make investments or acquisitions, pay dividends or other distributions to you, and otherwise fund and conduct our other businesses."

We
believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for
working capital and capital expenditures, for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other
developments. We may also need additional cash resources in the future to pursue opportunities for investment, acquisition, strategic alliance or other similar actions. It is possible that when we
need additional cash resources, financing will only be available to us in amounts or on terms that would not be acceptable to us or may not be available at all.

The
following table sets forth a summary of our cash flows for the periods indicated:

For the Year Ended December 31,2008

2009

2010(in thousands of $)Net cash provided by operating activities


4,866


26,747


42,967Net cash used in investing activities


(2,464
)

(2,752
)

(35,521
)Net cash provided by financing activities


3,266


500


166,156Effect of exchange rate changes


538


11


1,332Net increase in cash and cash equivalents


6,206


24,506


174,934Cash and cash equivalents, beginning of period


5,724


11,930


36,436Cash and cash equivalents at end of period


11,930


36,436


211,370


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Operating Activities

Our largest source of operating cash flows is course fees paid in cash by our students. We require all of our students to pay the total
course fees in full within seven days from the date they enter into a service contract with us. Our primary uses of cash in operating activities are teaching staff and employee compensation, rental
and renovation cost for leased premises and selling and marketing expenses. We also incur additional costs and expenses in connection with our becoming a public company, including costs to prepare for
our first Sarbanes Oxley Act of 2002 Section 404 compliance testing and additional legal and accounting costs to comply with the requirements of the Exchange Act that will apply to us as a
public company. We currently anticipate that we will be able to meet our needs to fund operations within at least the next 12 months with operating cash flow and existing cash balances.

We
had net cash provided by operating activities in an amount of $43.0 million for the year ended December 31, 2010, primarily attributable to the following factors
(i) net income of $10.3 million, (ii) an add-back of $3.6 million in depreciation and amortization of property and equipment, (iii) an
add-back of $1.9 million in share-based compensation, (iv) an increase in deferred revenue in an amount of $25.8 million due to the lower amount of course
fees recognized than collected during the period, and (v) an increase in accrued expenses and other current liabilities in an amount of $4.4 million, offset in part by a
$2.3 million prepaid expenses and other current assets in line with our business expansion.

We
had net cash provided by operating activities in an amount of $26.7 million for the year ended December 31, 2009, primarily attributable to the following factors
(i) net loss of $1.6 million, (ii) an add-back of $1.1 million in depreciation and amortization of property and equipment, and (iii) an increase in
deferred revenue in an amount of $26.0 million due to the increased amount of course fees collected but not recognized during the year, and (iv) an increase in accrued expenses and other
current liabilities in an amount of $2.1 million, offset in part by a $1.0 million prepaid expenses and other current assets in line with our business expansion.

We
had net cash provided by operating activities in an amount of $4.9 million for the year ended December 31, 2008, primarily attributable to the following factors
(i) net loss of $12.5 million,(ii) an add-back of $0.6 million in depreciation and amortization of property and equipment, and (iii) an increase in deferred
revenue in the amount of $17.6 million due to the increased amount of course fees collected but not recognized during the year, and (iv) an increase in accrued expenses and other
liabilities in an amount of $1.9 million, offset in part by a $2.0 million prepaid expenses and other current assets in line with our business expansion.

Investing Activities

Our cash used in investing activities normally is related to the purchase of property and equipment used by our learning centers in
their operations, which include leasehold improvement. Net cash used in investing activities amounted to $35.5 million for the year ended December 31, 2010, primarily resulted from
(i) the purchase of $20.9 million term deposits, (ii) the proceeds of $0.7 million from maturity of term deposits, and (iii) the purchase of property and equipment
in an amount of $15.4 million.

Net
cash used in investing activities amounted to $2.8 million for the year ended December 31, 2009, primarily resulted from (i) the purchase of $9.5 million
term deposits, (ii) the proceeds of $8.9 million from maturity of term deposits, and (iii) the purchase of property and equipment in an amount of $2.3 million. Net cash
used in investing activities amounted to $2.5 million for the year ended December 31, 2008, primarily resulted from purchase of property and equipment.

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Financing Activities

Our financing activities consist of payment of deferred consideration for acquisition of business, and issuance and sale of our Series
A1 and Series A2 preferred shares, as well as proceeds from our initial public offering and issuance of ordinary shares to Warburg Pincus. In the year ended December 31, 2010, proceeds
from our initial public offering and issuance of ordinary shares to Warburg Pincus, net of the payment of issuance cost, amounted to $133.6 million and $32.8 million, respectively. Cash
used in the year of 2010 was the payment of $0.2 million of deferred consideration for business acquisition. Net cash provided by financing activities was $0.5 million and
$3.3 million in 2009 and 2008, respectively. Net cash provided by financing activities in both 2009 and 2008 represented cash investment in our Series A1 and Series A2 preferred shares
by our Series A1 and Series A2 preferred shareholders.

Capital Expenditures

Our capital expenditures are incurred primarily in connection with renovation of leased properties and investment in equipment for our
learning centers. We opened 76, 23 and 76 learning centers in 2008, 2009 and 2010, respectively. Our capital expenditures were $2.5 million, $2.3 million and $15.4 million
in the years ended December 31, 2008, 2009 and 2010, respectively, representing 7.2%, 2.9% and 10.0% of our net revenue in such periods, respectively. Capital expenditures, including
expenditures incurred for leasehold improvement and property and equipment, per learning center was significantly lower in 2008, when the renovation cost of leasehold improvements per learning center
ranged from RMB200,000 ($30,303) to RMB300,000 ($45,455). Costs incurred for leasehold improvements have increased significantly since 2008 as the result of our efforts to upgrade our tutoring
facilities with increased investment in leasehold improvements. In addition, the space of the majority of learning centers opened in 2008 was smaller than that of the majority of the learning centers
opened in subsequent years. As a result, the capital expenditures for the year ended December 31, 2008 was significantly lower despite the fact that we opened a large number of new learning
centers in that year. The rapid expansion of our tutoring service network has required significant investment. Starting from 2010, we incurred about $0.2 million in capital expenditures per new
learning center. Our capital expenditures have been primarily funded by cash generated from our operations and, to a much lesser degree, from our financing activities.

We
expect to incur about $0.2 million in capital expenditures per new learning center depending primarily on the size and geographic location of the learning center, for a total
capital expenditures of approximately $18.5 million in the year ending December 31, 2011 in connection with our proposed investments in leasehold improvement and in property and
equipment to meet the expected growth of our operations. In addition, we expect to invest a total of approximately $3 million in the development and launch of supplementary online service
offerings in selected academic subjects on a pilot basis. We intend to cost-efficiently allocate our capital resources by continuing to lease most of our new facilities in the foreseeable
future. We have not encountered any difficulties in meeting our cash obligations to date and believe that we will be able to fund our capital needs for at least the next 12 months through cash
generated from our operating activities as well as net proceeds from our initial public offering.

Recent Accounting Pronouncements

In September 2009, the FASB issued an authoritative pronouncement regarding the revenue arrangements with multiple deliverables.
This pronouncement was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under existing pronouncement. Although the new
pronouncement retains the criteria from exiting pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the previous
separation criterion under existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be

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considered
a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this
pronouncement (1) prospectively to new or materially modified arrangements after the pronouncement's effective date or (2) retrospectively for all periods presented. Early application is
permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also do the following in the period of adoption:
(1) retrospectively apply this pronouncement as of the beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the prior interim periods' revenue,
income before taxes, net income, and earnings per share. The adoption of this pronouncement will not have any significant impact on our financial condition or results of operations.

In
September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition. This new pronouncement amends existing pronouncement to exclude from
their scope all tangible products containing both software and nonsoftware components that function together to deliver the product's essential functionality. That is, the entire product (including
the software deliverables and nonsoftware deliverables) would be outside the scope of software revenue recognition and would be accounted for under other accounting literature. The new pronouncement
include factors that entities should consider when determining whether the software and nonsoftware components function together to deliver the product's essential functionality and are thus outside
the revised scope of the authoritative literature that governs software revenue recognition. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can
elect to apply this pronouncement (1) prospectively to new or materially modified arrangements after the pronouncement's effective date or (2) retrospectively for all periods presented.
Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also do the following in the
period of adoption: (1) retrospectively apply this pronouncement as of the beginning of that fiscal year and (2) disclose the effect of the retrospective adjustments on the prior interim
periods' revenue, income before taxes, net income, and earnings per share. The adoption of this pronouncement will not have any significant impact on our financial condition or results
of operations.

In
January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to
add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurement on a gross basis rather than a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the
level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early
application is permitted and in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The adoption
of this pronouncement will not have any significant impact on our financial condition or results of operations.

In
April 2010, the FASB issued an authoritative pronouncement regarding the milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements
that include milestones relating to research or development deliverables. The pronouncement specifies guidance that must be met for a vendor to recognize consideration that is contingent upon
achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this pronouncement
regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement will be effective for fiscal years, and interim periods within
those years, beginning on or

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after
June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior
periods is also permitted. The adoption of this pronouncement will not have any significant impact on our financial condition or results of operations.

In
December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests
if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for
impairment tests performed during entities' fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. The adoption
of this pronouncement will not have any significant impact on its financial condition or results of operations.

B.    Research and Development, Patents and Licenses, etc.

Our information technology team consists of personnel with extensive experience with large-scale Internet and application development, data processing, product
management and operations management. Our information technology team has used a combination of commercially available and custom developed software and hardware systems to establish a scalable
technology platform to support our expanding operations and improve our services, and has been crucial to our operations and our successful expansion to date. Currently, our technology platform
consists of our comprehensive operations management platform, our extensive educational resources database and our online presence, all of which share a common information technology platform that is
secure, scalable and reliable.

Our
operations management platform integrates our key management and administrative functions and consists of technology applications that address our key business needs, including
school management, financial reporting, sales and operational management and human resources management. Our educational resources database consists of an extensive collection of sample questions and
exercises, course outlines, and other tutoring materials and is easily accessible by our service professionals across the country. Our web site presents information about our personalized tutoring
services, our professional service team, our company and other pertinent information.

We
aim to continue to improve and upgrade our technology platform. We have developed our proprietary enterprise resource planning system, Xueda ERP 2.0, or ERP, to improve and modulize
our educational resources database to allow easier access, faster retrieval and better reliability. We have started deploying our ERP system in selected locations and plan to roll out the whole ERP
system to all of our learning centers by the third quarter of 2011. In addition, we have redesigned and are continuing to refine our web site to offer our students complementary online services, a
broader array of pedagogical product lines and more advanced personalized services.

We
have developed our proprietary intellectual property over the past years. Our trademarks, copyrights, trade secrets and other intellectual property rights such as business and
technical know-how distinguish our services and products from those of our competitors, and contribute to our competitive advantage in our target markets. To protect our brand and other
intellectual property, we rely on a

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combination
of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees, contractors and others.

Certain
trademarks and logos, including " LOGO", "Xueda," " LOGO" and " LOGO", originally registered by Xueda Education Technology (Beijing) Co., Ltd., or Xueda Technology, our
variable interest entity, and exclusively used by us before
have been transferred to our PRC subsidiary, Xuecheng Century as approved by the Trademark Office of the State Administration for Industry and Commerce in China, or the SAIC. In addition, Xuecheng
Century is in the process of applying to the Trademark Office of SAIC for the registration of certain other trademarks and logos, including " LOGO" and " LOGO", as well as "Elite Class" for our small-group tutoring programs. Furthermore, our PRC subsidiary, Xuecheng Century, is in the
process of registering utility model
and design patents with PRC Intellectual Property Bureau for certain teaching utilities it designed and developed, such as various kinds of multi-functional teaching desks. Our main web site is
located atwww.21edu.com. In addition, we have registered certain domain names, including21edu.com, xueda.com,ejiajiao.comandexueda.com.

We
have obtained from relevant government agencies Software Product Certificates for seven sets of software programs developed by us, including Xueda Education Educational Resource
Integration System Software V1.0 and Xueda Education Student Personalized Performance Testing System Software v1.0.

We
cannot be certain that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. In addition,
there can be no assurance that competitors will not independently develop similar intellectual property. If others are able to copy and use our programs and services, we may not be able to maintain
our competitive position. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving and could involve substantial risk to us. If
litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which
could harm our business.

C.    Trend Information.

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from
January 1, 2011 to December 31, 2011 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital
reserves, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

D.    Off-Balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered
into any derivative contracts that are indexed to our shares and classified as shareholders' equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any
retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest
in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

E.    Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2010:

Payments Due by PeriodTotal

Less than 1 year

1-3 years

3-5 years

More than 5 Years(in thousands of $)Operating leasing obligations


56,247


19,237


25,351


9,543


2,116


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F.     Safe Harbor

See "Forward-Looking Statements."

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.    Directors and Senior Management

The following table sets forth certain information relating to our directors and executive officers.

Name

Age

Position/TitleRubin Li


33

Chairman of board of directorsXin Jin


34

Director and chief executive officerJun Wang


40

Director and presidentJinbo Yao


34

DirectorGongquan Wang


49

DirectorYafei Wang


56

Independent DirectorSean Shao


54

Independent DirectorCheung Lun Julian Cheng


37

DirectorJunfeng Gao


38

Chief financial officerHai Yang


43

Chief information officerWei Zhang


52

Vice presidentQiang Deng


43

Vice president


Biographical Information

Mr. RubinLi is a co-founder and chairman of the board of directors
of our company. Since 2001, Mr. Li has served as co-president, director and chairman of the board of directors of our company. Prior to founding our company, from 2000 to 2001,
Mr. Li was a computer engineer of Tsinghua Tong Fang Co., Ltd., a corporation listed on the Shanghai Securities Exchange in the PRC. Mr. Li received his bachelor's degree
in thermal energy and engineering from the University of Science and Technology Beijing in China in 2000. He completed his studies in master's courses in educational economics and management at
Beijing Normal University in China from 2006 to 2008.

Mr. Xin Jinis a co-founder, director and the chief executive officer of our company. Since 2002, Mr. Jin has
served in various other managerial positions at our company, including general manager and co-president. Prior to founding our company, he served as a marketing director and product
director of www.net.cn, a China-based Internet application service provider from 1999 to 2002. Mr. Jin received his bachelor's degree in economics and business from the Capital University of
Economics and Business in China in 1999.

Mr. Jun Wanghas served as a director of our company since 2008 and the president of our company since 2010. Prior to joining our
company, Mr. Wang served as a vice president at CDH Venture Partners from 2007 to 2010 and led their investment in our company. From 2005 to 2007, Mr. Wang served as an associate at
McKinsey & Company in Beijing, China. From 1997 to 2005, Mr. Wang worked in various managerial and engineering positions at high tech companies such as Amazon.com, Microsoft and Oracle in
the U.S. Mr. Wang received his MBA degree from the Kellogg School of Management of Northwestern
University in 2005, his master's degree in computer science from the Iowa State University in 1997 and his bachelor's degree in computer science from the Peking University in China in 1995.

Mr. Jinbo Yaois a co-founder of our company and has served as a director of our company since 2001. Mr. Yao
currently also serves as chief executive officer ofwww.58.com, a China-based classified information web site founded by him in 2005. From 2000 to 2005,
Mr. Yao served as a product

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manager,
a chief director and a vice president for marketing atwww.net.cn, a China-based Internet application service provider. Prior to that, in 2000,
Mr. Yao foundedwww.domain.cn, which was subsequently acquired bywww.net.cn. Mr. Yao
received his bachelor's degree in computer science and chemistry from the Ocean University of China in Qingdao, China in 1999.

Mr. Gongquan Wanghas served as a director of our company since 2010. Mr. Wang founded CDH Venture Partners in 2005 and has
served as a general partner. Prior to founding CDH Venture Partners, Mr. Wang was a general partner with IDG Technology Venture Investment, Inc. from 1999 to 2005, where he was
responsible for overseeing the operational management of the firm's portfolio companies. In 1991, Mr. Wang co-founded Vantone Industry Group where he served in various capacities
including president, chairman of the board of directors and managing director. Mr. Wang received his bachelor's degree from Jilin University of Technology in 1984.

Ms. Yafei Wanghas served as a director of our company since 2008 and was determined to be an independent director in
February 2011. Ms. Wang has 19 years of experience in management and corporate finance matters. She has been an associate professor of the Guanghua School of Management of Peking
University since 1995 and an independent director of Li Ning Company Limited since 2002. Ms. Wang received her MBA degree from Lancaster University Management School in the
United Kingdom in 1990 and her bachelor's degree in international politics from Fudan University in China in 1981. From 1985 to 1986, Ms. Wang was a visiting scholar at the University of
Maryland, College Park in the United States.

Mr. Sean Shaohas served as an independent director of our company and chairman of the audit committee since 2010. Mr. Shao
currently serves as (i) independent director, chairman of the audit committee and member of the nominating committee and the compensation committee of: American Dairy, Inc., a
China-based dairy products company listed on the NYSE; China Biologic Products, Inc., a China-based biopharmaceutical company listed on the NASDAQ; Renhuang Pharmaceuticals, Inc., a
China-based pharmaceutical company listed on the AMEX; and Yongye International, Inc., a Chinese agricultural company listed on the NASDAQ; (ii) independent director and member of the
audit committee and nominating committee of AsiaInfo-Linkage, Inc., a China-based telecom software solutions provider listed on the NASDAQ, (iii) independent director and member of the
audit committee, nominating committee and compensation committee of China Medicine Corporation, a distributor and developer of medicines listed on the bulletin board; (iv) independent director,
chairman of the audit committee and member of the compensation committee of China Recycling Energy Corporation, an energy recycling system design company listed on the NASDAQ; (v) independent
director, chairman of the nominating committee and member of the audit committee of Agria Corporation, a China-based agricultural company listed on the NYSE; and (vi) independent director,
chairman of the audit committee and compensation committee and member of the nominating committee of China Nuokang Bio-Pharmaceutical, Inc., a biopharmaceutical company
listed on the NASDAQ. He served as the chief financial officer of Trina Solar Limited from 2006 to 2008, where he assisted in its listing on the NYSE in 2006. In addition, Mr. Shao served from
2004 to 2006 as the chief financial officer of ChinaEdu Corporation, a Chinese educational service provider, and of Watchdata Technologies Ltd., a Chinese security software company. Prior to
that, Mr. Shao worked at Deloitte Touche Tohmatsu CPA Ltd. for approximately a decade. Mr. Shao received his master's degree in health care administration from the University of
California at Los Angeles in 1988 and his bachelor's degree in art from East China Normal University in 1982. Mr. Shao is a member of the American Institute of Certified Public Accountants.

Mr. Cheung Lun Julian Chenghas served as a director of our company since 2010. Mr. Cheng is a managing director in the
China group at Warburg Pincus LLC, which he joined in 2000. Mr. Cheng is also a director for a number of other private companies. Prior to joining Warburg Pincus Asia LLC,
Mr. Cheng worked for the capital markets and investment banking divisions of Salomon Smith Barney

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and
Bankers Trust in Hong Kong. Mr. Cheng received his bachelor's degree in economics from Harvard University in the United States in 1996.

Mr. Junfeng Gaohas served as our chief financial officer since 2010. Prior to joining our company, Mr. Gao served as
finance director of ATA Inc., a corporation listed on the NASDAQ that primarily provides computer-based testing and educational services in China from 2008 to 2010. From 2007 to 2008,
Mr. Gao served as a director of Assurance and Advisory Business Services of Ernst & Young's Beijing office. From 1996 to 2007, he worked at PricewaterhouseCoopers's offices in Shanghai,
Philadelphia and Beijing, including serving as a senior manager of Assurance and Advisory Business Services from 2003 to 2007. Mr. Gao received his bachelor's degree in accounting from the
Shanghai University of Finance and Economy in 1996. Mr. Gao is a member of the Association of Chartered Certified Accountants and the Chinese Institute of Certified Public Accountants.

Mr. Hai Yanghas served as our chief information officer since 2010. Prior to joining our company, Mr. Yang served as vice
president of products and technology ofChinaHR.comCorporation, an online recruiting service web site from 2004 to 2010. From 2001 to 2004,
Mr. Yang served as a vice president of Xinyuan Education Co., Ltd. From 1999 to 2001, Mr. Yang served as chief technology officer and executive vice president of Oz
Education System, a Canadian e-learning company. In 1999, Mr. Yang served as a deputy general manager ofNetEase.com, a China-based
Internet portal web site. From 1998 to 1999, he served as an executive deputy chief editor of China Internet Weekly, a Chinese magazine on the Internet industry. Prior to 1998, Mr. Yang served
as an engineer and a manager of the sound products research & development center of Eletech Enterprise Co., Ltd. Mr. Yang received his master's degree in signal and
information processing and his bachelor's degree in radio information systems from Tsinghua University in 1995 and 1992, respectively.

Ms. Wei Zhanghas served as a vice president of our company since 2008. Prior to joining our company in 2006, Ms. Zhang
served as a vice president and director of the education management department of
Shanxi Dongda Enterprise Group from 2003 to 2005. From 2000 to 2003, she served as a vice president of Sichuan Enlide Education Group. From 1998 to 2000, Ms. Zhang served as a teaching director
and the principal of Shanxi Dongda School. From 1982 to 1998, Ms. Zhang worked with schools affiliated with the Third Engineering Bureau of the Ministry of Railway of the PRC in various
capacities, including as a teacher, teaching director, and educational research and development director. Ms. Zhang graduated from Hegang Teachers' College in Heilongjiang, China in 1979 and
also studied at the biology department of Harbin Normal University in China in 1981.

Mr. Qiang Denghas served as a vice president of our company since 2007 and joined our company in 2005. From 2001 to 2005,
Mr. Deng worked in various managerial positions at long distance learning companies including Peking University-Affiliated Schools Lianxiang Long-distance
Education Co., Ltd. and Internet School of Beijing No. 4 High School. From 1998 to 2001, Mr. Deng served as the director for www.chinaedu.com. From 1996 to 1998, he served as a
physics teacher at Beijing Huicai Private School. From 1990 to 1996, he worked as a sales manager at
Huahai Computer Co., Ltd. Mr. Deng received his bachelor's degree in mechanical engineering from Beijing University of Civil Engineering and Architecture in 1990 and completed the
master's courses in developing and educational psychology in the Beijing Normal University in 2008.

The
business address of each of our directors and executive officers is c/o Xueda Education Group, A-4 Xibahe Beili, Chaoyang District, Beijing, 100028, People's
Republic of China.

B.    Compensation

Compensation of Directors and Executive Officers

During 2010, the aggregate cash compensation that we paid to our executive officers as a group was RMB12.8 million
($1.9 million), and the aggregate cash compensation that we paid to our

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non-executive
directors as a group was RMB0.06 million ($9,401). We paid RMB200,000 ($30,303) cash compensation to non-employee directors in 2010. Walkers, our Cayman
Islands counsel, has advised us that Cayman Islands law does not require an exempted company incorporated in the Cayman Islands, such as our company, to disclose the individual compensation of its
executive officers and directors. Our full-time employees in the PRC, including our
executive officers, participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to qualified employees. We do not provide our directors with any pension, retirement or similar benefits on termination.

As
of the date of this annual report, options to purchase an aggregate of 10,258,904 ordinary shares have been granted under our equity incentive plan to our directors, executive
officers and employees. These options were originally granted with an exercise price of $0.99 per share and expiration period of ten years. On October 29, 2010, the exercise price of the
3,343,845 share options granted to an officer on March 16, 2010 was increased to $1.89 per share from $0.99 per share. As of the date of this annual report, options to purchase
10,115,840 ordinary shares are outstanding. See "Item 6. B. Compensation  Stock-Based Compensation Plans."

Employment Agreements

We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers
is employed for a specified time period. We may terminate his or her employment for cause at any time, with prior written notice, for certain acts of the executive officer, including but not limited
to a conviction to a felony, or willful gross misconduct by the executive officer in connection with his or her employment, and in each case if such acts have resulted in material and demonstrable
financial harm to us. An executive officer may, with prior written notice, terminate his or her employment at any time for any material breach of the employment agreement by us that is not remedied
promptly after receiving the remedy request from the employee. Furthermore, either party may terminate the employment agreement at any time without cause upon advance written notice to the other
party. Upon termination, the executive officer is generally entitled to a severance pay of at least one month's salary.

Each
executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except in pursuance of his or her duties in
connection with the employment, any of our confidential information, technological secrets, commercial secrets and know-how. Our executive officers have also agreed to disclose to us all
inventions, designs and techniques resulted from work performed by them, and to assign us all right, title and interest of such inventions, designs and techniques.

Stock-Based Compensation Plans

Our equity incentive plan adopted in November 2009, or the 2009 share incentive plan, provides for the grant of options, share
appreciation rights, or other share-based awards,
referred to as "awards." The purpose of the plan is to aid us in recruiting and retaining key employees, directors or consultants and to motivate such persons to exert their best efforts on behalf of
our company by providing incentives through the granting of awards. Our board of directors and shareholders authorized the issuance of up to 11,146,151 ordinary shares upon exercise of awards
granted under our share incentive plan. Our board of directors believes that our company will benefit from the added interest that such persons will have in the welfare of the company as a result of
their proprietary interest in the company's success.

Termination of Awards.Options have specified terms set forth in a share option agreement. If the recipient's employment with the
company is
terminated for any reason, the recipient's vested options

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will
remain exercisable subject to the provisions of the plan and the option agreement and the recipient's unvested options will terminate without consideration. If the options are not exercised or
purchased by the last day of the exercise period, they will terminate.

Administration.Our share incentive plan is administered by the compensation committee of our board of directors. Our board of directors
or the
compensation committee is authorized to interpret the plan, to establish, amend and rescind any rules and regulations relating to the plan, and to make any other determinations that it deems necessary
or desirable for the administration of the plan. Our board of directors or the compensation committee will determine the provisions, terms and conditions of each award consistent with the provisions
of the plan, including, but not limited to, the exercise price for an option, vesting schedule, forfeiture provisions, form of payment of exercise price and other applicable terms.

Option Exercise.The term of options granted under our share incentive plan may not exceed ten years from the date of grant. The
consideration to be
paid for our ordinary shares upon exercise of an option or purchase of shares underlying the option may include cash, check or other cash-equivalent, consideration received by us in a
cashless exercise and, to the extent permitted by our board of directors or the compensation committee and subject to the provisions of the option agreement, ordinary shares or a combination of
ordinary shares and cash or cash-equivalent.

Change in Control.If a third-party acquires us through the purchase of all or substantially all of our assets, a merger or other
business
combination or if during any two consecutive year period individuals
who at the beginning of such period constituted the board of directors cease for any reason to constitute a majority of our board of directors, then, if so determined by our board of directors or the
compensation committee with respect to the applicable award agreement or otherwise, any outstanding awards that are unexercisable or otherwise unvested or subject to lapse restrictions will
automatically be deemed exercisable or otherwise vested or no longer subject to lapse restrictions, as the case may be, as of immediately prior to such change in control. Our board of directors or the
compensation committee may also, in its sole discretion, decide to cancel such awards for fair value, provide for the issuance of substitute awards that will substantially preserve the otherwise
applicable terms of any affected awards previously granted, or provide that affected options will be exercisable for a period of at least 15 days prior to the change in control but
not thereafter.

Amendment and Termination of Plan.Our board of directors may at any time amend, alter or discontinue our share incentive plan.
Amendments or
alterations to our share incentive plan are subject to shareholder approval if they increase the total number of shares reserved for the purposes of the plan or change the maximum number of shares for
which awards may be granted to any participant. Any amendment, alteration or termination of our share incentive plan must not adversely affect awards already granted without written consent of the
recipient of such awards. Unless terminated earlier, our share incentive plan will continue in effect for a term of ten years from the date of its adoption.

Granted Options.As of the date of this annual report, we have granted options to purchase an aggregate of 10,258,904 ordinary
shares to our
directors, officers and employees, options to purchase 10,115,840 of which are outstanding. Such options have an exercise price of $0.99 to $1.89 per share and are subject to a four-year
vesting schedule with 25% vesting on each of the first, second, third and fourth anniversary of the grant date.

C.    Board Practices

We have seven directors, two of whom are independent directors, on our board of directors. Any director on our board may be removed by way of an ordinary
resolution of shareholders. Any vacancies on our board of directors or additions to the existing board of directors can be filled by the affirmative

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vote
of all of the remaining directors. Each of our directors holds office until such director resigns or is removed by way of an ordinary resolution of shareholders.

All
of our executive officers are appointed by and serve at the discretion of our board of directors. Our executive officers are elected by and may be removed by a majority vote of our
board of directors.

Board Committees

To enhance our corporate governance, we have established two committees under the board of directors: the audit committee and the
compensation committee. We have adopted a charter for each of these committees. The committees have the following functions and members.

Audit Committee

Our audit committee consists of Mr. Sean Shao, Mr. Gongquan Wang and Ms. Yafei Wang. Mr. Sean Shao is the
chairman of our audit committee and meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Our board of director has determined that each of
Mr. Shao and Ms. Wang satisfies the requirements for an "independent director" within the meaning of Section 303A of the NYSE Listed Company Manual and meets the criteria for
independence set forth in Rule 10A-3 of the Exchange Act. Our board of directors has determined that the simultaneous service by Mr. Sean Shao on the audit committee of nine
other public companies would not impair his ability to effectively serve on our audit committee. Our audit committee will consist solely of independent directors within one year of our initial public
offering. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among
other things:



Compensation Committee

Our compensation committee consists of Mr. Gongquan Wang, Ms. Yafei Wang and Mr. Jinbo Yao. Our board of directors
has determined that Ms. Yafei Wang satisfies the requirements for an "independent director" within the meaning of section 303A of the NYSE Listed Company Manual and

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meets
the criteria for independence set forth in Rule 10A-3 of the Exchange Act. Our compensation committee assists the board in reviewing and approving the compensation structure
of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are not prohibited from
direct involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation
committee is responsible for, among other things:



Duties of Directors

Under Cayman Islands law, our directors have a fiduciary duty to act honestly in good faith with a view to our best interests. Our
directors also have a duty to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors
must ensure compliance with our third amended and restated memorandum and articles of association. A director may be liable for any loss suffered by us as a result of their fiduciary duties.

The
functions and powers of our board of directors include, among others:



Remuneration and Borrowing

The directors may determine remuneration to be paid to the directors. The compensation committee will assist the directors in reviewing
and approving the compensation structure for the directors. The directors may exercise all the powers of the company to borrow money and to mortgage or charge its undertaking, property and uncalled
capital and to issue debentures or other securities, whether outright or as security, for any debt obligations of our company or of any third party.

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Qualification

There is no requirement for our directors to own any shares in our company in order for them to qualify as a director.

Terms of Directors and Executive Officers

We will initially have seven directors, one of whom is an independent director. Any director on our board may be removed by way of an
ordinary resolution of shareholders. Any vacancies on our board of directors or additions to the existing board of directors can be filled by the affirmative vote of all of the remaining directors.
Each of our directors holds office until such director resigns or is removed by way of an ordinary resolution of shareholders.

All
of our executive officers are appointed by and serve at the discretion of our board of directors. Our executive officers are elected by and may be removed by a majority vote of our
board of directors.

D.    Employees

Employees

As of December 31, 2010, December 31, 2009 and December 31, 2008, we had 12,930, 8,077 and
5,297 full-time employees, respectively, including 7,575, 4,580 and 2,645 instructors, respectively. As of December 31, 2010, we had the following
full-time employees by function:

Instructors


7,575Education consultants


1,068Study counselors


1,007Sales and marketing


268General and administration staff


3,012Total


12,930




As required by regulations in China, we participate in various employee social security plans that are administered by municipal and provincial
governments, including housing, pension, medical insurance and unemployment insurance. We are required under relevant PRC laws to make contributions to employee benefit plans at specified percentages
of the total salaries, bonuses and certain allowance of our employees, up to a maximum amount specified by the relevant local governments from time to time.

None
of our employees are represented by collective bargaining arrangements, and we consider our relations with our employees to be good.

E.    Share Ownership

There are no different voting rights among our shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of
our company. For information regarding the share ownership of our directors and officers, see "Item 7.  Major Shareholders and Related Party
Transactions  Major Shareholders." For information as to stock options granted to our directors, executive officers and other employees, see "Item 6. B.
Compensation  Stock-Based Compensation Plans."

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ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.    Major Shareholders

The following table sets forth information with respect to the beneficial ownership of our ordinary shares, on a fully diluted basis, as of May 20,
2011, by:



The
calculations in the table below is based on 139,918,640 ordinary shares outstanding as of May 20, 2011.

Beneficial
ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership
of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any
other security. These shares, however, are not included in the computation of the percentage ownership of any other person.

The
business address of each of our directors and executive officers is c/o Xueda Education Group, A-4 Xibahe Beili, Chaoyang District, Beijing 100028, People's
Republic of China.

Number

%Directors and Executive Officers:Rubin Li(1)


20,484,930


14.6Xin Jin(2)


27,039,680


19.3Jun Wang


*


*Jinbo Yao(3)


14,452,980


10.3Gongquan Wang(4)


21,555,920


15.4Yafei Wang(5)


3,518,770


2.5Sean Shao


*


*Cheung Lun Julian Cheng(6)


12,124,000


8.7Junfeng Gao


*


*Hai Yang


*


*Wei Zhang


*


*Qiang Deng(7)


2,134,990


1.5All directors and executive officers as a group


89,187,270


63.7Principal Shareholders:Golden Section Holding Corporation(8)


27,039,680


19.3Goodor Corporation(9)


20,484,930


14.6CDH Xueda Limited(10)


21,555,920


15.4Nihao China Corporation(11)


14,452,980


10.3WP X Investments IV Ltd.(12)


12,124,000


8.7


*Beneficially
owns less than 1% of our outstanding ordinary shares.(1)Includes
23,484,930 ordinary shares owned by Goodor Corporation, a British Virgin Islands company 100% beneficially owned by Mr. Li's
family trust.(2)Includes
27,039,680 ordinary shares owned by Golden Section Holding Corporation, a British Virgin Islands company 100% beneficially owned by
Mr. Jin's family trust.(3)Includes
14,452,980 ordinary shares owned by Nihao China Corporation, a British Virgin Islands company 100% beneficially owned by Mr. Yao's
family trust.


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(4)Includes
21,555,920 ordinary shares issued upon conversion at the time of our initial public offering of the same number of Series
A1 preferred shares owned by CDH Xueda Limited. See note 10 below. Mr. Gongquan Wang disclaims beneficial ownership of any of the shares held by CDH Xueda Limited except to the
extent of his pecuniary interest therein.(5)Includes
3,518,770 ordinary shares issued upon conversion at the time of our initial public offering of the same number of Series A2 preferred
shares owned by Happyall Ltd, a British Virgin Islands company 100% beneficially owned by Ms. Yafei Wang.(6)Includes
10,124,000 ordinary shares and 1,000,000 ADSs representing 2,000,000 ordinary shares held by WP X Investments IV Ltd.
See note 12 below. Mr. Cheng disclaims beneficial ownership of any of the shares held by WP X Investments IV Ltd. except to the extent of his pecuniary interest therein.(7)Includes
2,134,990 ordinary shares owned by Kaiyuan Technology Limited, a British Virgin Islands company 100% beneficially owned by
Mr. Qiang Deng.(8)Includes
27,039,680 ordinary shares owned by Golden Section Holding Corporation, a British Virgin Islands company 100% beneficially owned by
Mr. Xin Jin. The mailing address of Golden Section Holding Corporation is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.(9)Includes
23,484,930 ordinary shares owned by Goodor Corporation, a British Virgin Islands company 100% beneficially owned by Mr. Rubin Li. The
mailing address of Goodor Corporation is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.(10)Includes
21,555,920 ordinary shares issued upon conversion at the time of our initial public offering of the same number of Series
A1 preferred shares owned by CDH Xueda Limited, a British Virgin Islands company 100% beneficially owned by CDH Venture Partners. CDH Venture GP I Company Limited, a Cayman Islands
exempted limited liability company, is the general partner of CDH Venture Partners, L.P. and has the power to direct CDH Venture Partners as to the voting and disposition of shares directly and
indirectly held by CDH Venture Partners, L.P. Mr. Gongquan Wang is a director and a member of the investment committee of CDH Venture GP I Company Limited. Mr. Gongquan
Wang disclaims beneficial ownership of any of the shares held by CDH Xueda Limited except to the extent of his pecuniary interest therein. The mailing address of CDH Xueda Limited is Kingston
Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands.(11)Includes
14,452,980 ordinary shares owned by Nihao China Corporation, a British Virgin Islands company 100% beneficially owned by Mr. Jinbo
Yao. The mailing address of Nihao China Corporation is Trinity Chambers, P.O. Box 4301, Road Town, Tortola, British Virgin Islands.(12)Includes
10,124,000 ordinary shares and 1,000,000 ADSs representing 2,000,000 ordinary share held by WP X Investments
IV Ltd., a Cayman Islands company. Based on the Schedule 13D file with the Securities and Exchange Commission on November 12, 2010, WP X Investments IV Ltd., is a
wholly owned subsidiary of Warburg Pincus Private Equity X, L.P., a Delaware limited partnership and Warburg Pincus X Partners, L.P., a Delaware limited partnership, both
of which are managed by Warburg Pincus LLC, a New York limited liability company. Warburg Pincus X, L.P., a Delaware limited partnership, is the sole general partner of
each of Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. Warburg Pincus X LLC, a New York limited liability company, is the
sole general partner of Warburg Pincus X, L.P. Warburg Pincus Partners, LLC, a New York limited liability company, is the sole member of Warburg Pincus X LLC.
Warburg Pincus & Co., a New York general partnership, is the managing member of Warburg Pincus Partners, LLC. Each Messrs. Charles R. Kaye and Joseph P. Landy is a
managing general partner of Warburg Pincus & Co. and co-president and managing member of Warburg Pincus LLC. The address of the principal business and principal office
of WP X Investments IV Ltd. is c/o Warburg Pincus Asia Ltd, 8th Floor, Newton Tower, Sir William Newton Street, Port Louis, Mauritius. The address of the principal business
and principal office of each of the other entities and persons is c/o Warburg Pincus LLC, 450 Lexington Avenue, New York, New York 10017.


As of May 20, 2011, other than the 26.1% of our ordinary shares underlying our ADSs which were held by Citibank,
N.A.  Hong Kong, as the custodian on behalf of Citibank, N.A., the depositary, none of our ordinary shares were held in the United States. Our ADSs,
representing 36,563,474 ordinary shares, or 26.1% of our total issued and outstanding ordinary shares, were held by one registered holder of record in the United States. Since these ADSs are
held by brokers or other nominees, the number of record holders in the United States is not representative of the number of beneficial holders or their country of residence.

None
of our existing shareholders has different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control
of our company.

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B.    Related Party Transactions

Contractual Arrangements relating to Certain Affiliated Entities

See "Item 4. Information on the Company  Organizational Structure."

In
2008, we extended a personal loan, which was unsecured, free of interest and repayable on demand, in an amount of $203 thousand to Mr. Jinbo Yao, one of our directors
and a beneficial owner of our ordinary shares. This loan was repaid in October 2010.

We
use advertising services provided by58.com, a PRC-incorporated Internet-based classified information provider in which
Mr. Jinbo Yao is a major shareholder. In 2008, 2009 and 2010, we paid advertising service fee in amounts of $141 thousand, $42 thousand and $565 thousand, respectively, to 58.com.
There was no unsettled balance as of December 31, 2008, 2009 or 2010. We may continue to use advertising services provided by 58.comin the future.

In
2009, Xueda Technology extended loans to its shareholders in a total amount of $567 thousand to increase the registered capital of Xueda Information pursuant to the contractual
arrangement. These loans were free of interest and had no definite terms of repayment. The total amount of the loans was held by Mr. Xin Jin, our director, chief executive officer and a
beneficial owner of our ordinary shares, on behalf of such shareholders. The amount of these loans was raised to $587 thousand in 2010. Upon the increase in Xueda Information's registered
capital in August 2010, these loans were settled as the cash advanced to Mr. Xin Jin had been invested in Xueda Information.

In
addition, in the first half of 2010, we extended loans in a total amount of $41 thousand to Shanghai Chuan Xue Network Technology Co., Ltd., a company majority
owned by Mr. Xin Jin. These loan are free of interest and have no definite terms of repayment. These loans were outstanding as of December 31, 2010 and will be repaid in full
in 2011.

Series A1 and Series A2 Preferred Shares

On August 28, 2009, we issued to CDH Xueda Limited 21,555,920 Series A1 preferred shares and to
Happyall Ltd, Poda Capital Limited and Wavesong Ltd, or the Series A2 investors, an aggregate of 8,796,920 Series A2 preferred shares. All outstanding Series A1 and
Series A2 preferred shares have been automatically converted into our ordinary shares at a conversion ratio of 1:1, upon the completion of our initial public offering. The proceeds from the
issuance and sale of Series A1 and Series A2 preferred shares were used for capital expenditure and working capital purposes.

Employment Agreements

See "Item 6.B. Directors, Senior Management and Employees  Compensation of Directors and
Executive Officers  Employment Agreements."

Stock Incentive Plan

See "Item 6.B. Directors, Senior Management and Employees  Compensation of Directors and
Executive Officers  2006 Stock Incentive Plan."

Shareholders of our VIE

All but one of the shareholders of our VIE are also beneficial owners of our shares. See "Item 4. Information on the
Company  Organizational Structure." We have not created any additional incentives, whether financial, contractual or otherwise, to encourage the shareholders of
our VIE, in their capacity as such, to act in the best interest of our company.

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Registration Rights

We entered into a shareholders agreement with all of our then existing shareholders in August 2009 and an investor and
registration rights agreement with Warburg Pincus in October 2010, under which we granted those shareholders and Warburg Pincus certain registration rights, including demand registration
rights, piggyback registration rights and Form F-3 registration rights.

Demand Registration Rights

Under the terms of the shareholders agreement dated August 28, 2009 among us and our then existing shareholders, from the date
that is six months after our initial public offering, shareholders holding at least 20% of our registrable securities then outstanding may, on no more than two occasions, require us to file a
registration statement under the Securities Act covering the registration of all or part of the registrable securities. Under the investor and registration rights agreement by and between us and
Warburg Pincus dated October 20, 2010, Warburg Pincus has similar demand registration rights on no more than two occasions.

Registrable
securities are (i) any of our ordinary shares issuable or issued upon conversion of our preferred shares, (ii) any of our ordinary shares issued as a dividend
or other distribution with respect to, in exchange for, or in replacement of, the shares referenced in (i) and (ii), (iii) any other ordinary shares owned or later acquired by the holder
of our preferred shares, and (iv) the ordinary shares and
ADSs issued and offered by us and the ordinary shares sold by Goodor Corporation to Warburg Pincus, but excluding any of our shares sold in a transaction in which the registration rights are not
assigned in accordance with the shareholders agreement and any registrable securities sold in a public offering, whether sold pursuant to Rule 144 of the Securities Act, or Rule 144, in
a registered offering, or otherwise.

We
will not be obligated to effect any such registration if we have, within the six-month period preceding the date of such request, already effected a registration under the
Securities Act pursuant to provisions regarding demand registration or Form F-3 registration, or in which the holders of registrable securities had an opportunity to
participate pursuant to the provisions relating to piggyback registration. We have the right to defer the filing of a registration statement for up to 90 days if we furnish to the holders of
registrable securities requesting such registration a certificate signed by our president or chief executive officer stating that, in the good faith judgment of our board of directors, it would be
materially detrimental to us and our shareholders for such registration statement to be filed at such time, provided that we may not utilize this deferral right more than once in any
12-month period. The underwriters of any underwritten offering have the right to limit the number of shares to be included in the applicable registration statement so long as they
determine that marketing factors require such a limitation, provided that:



Piggyback Registration Rights

Holders of registrable securities also have "piggyback" registration rights, which may require us to register all or any part of the
registrable securities then held by such holders when we register any ordinary shares, but excluding registration relating to any employee benefit plan or relating to a corporate reorganization.
Registration pursuant to piggyback registration rights is not deemed to be a

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demand
registration, and there is no limit on the number of times the holders may request registration of their registrable securities pursuant to their piggyback registration rights. The underwriters
of any underwritten offering have the right to limit the number of shares to be included in the applicable registration statement so long as they determine in good faith that marketing factors require
such a limitation, provided that:



Form F-3 Registration Rights

Holders holding at least 20% of our registrable securities then outstanding, or Warburg Pincus, as the case may be, may request in
writing that we effect a registration on Form F-3 and any related qualification or compliance with respect to all or a part of the registrable securities owned by such
holder. We will not be obligated to effect any such registration, qualification or compliance pursuant to provisions regarding Form F-3 registration if, among other things, the
aggregate amount of securities to be sold under the registration statement is less than $500,000 or we have, within the six-month period preceding the request, already effected a
registration under the Securities Act. Registration pursuant to
Form F-3 registration rights is not deemed to be a demand registration, and there is no limit on the number of times the holders may exercise their Form F-3
registration rights.

Expenses of Registration

We will pay all expenses incurred by us relating to any demand, piggyback or Form F-3 registration, except that the
requesting holders shall bear the expense of any underwriting discounts and selling commissions relating to the offering of their securities. We will not be required to pay for any expenses of any
registration proceeding begun pursuant to demand registration rights, if the registration request is subsequently withdrawn at the request of the holders of a majority of the registrable securities to
be registered.

Termination of Our Obligations

Notwithstanding the foregoing, we will have no obligations to effect the demand registration, piggyback registration and
Form F-3 registration with respect to any registrable securities proposed to be sold by a holder of registrable securities in a registered public offering (i) two years after
the consummation of a qualified initial public offering, or (ii) if, in the opinion of our counsel, all such registrable securities proposed to be sold by a holder may then be sold without
registration in any 90 day period pursuant to Rule 144 under the Securities Act.

C.    Interests of Experts and Counsel

Not applicable.

ITEM 8.    FINANCIAL INFORMATION

A.    Consolidated Statements and Other Financial Information

See "Item 18. Financial Statements."

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Legal and Administrative Proceedings

From time to time, we are subject to legal proceedings, investigations and claims incidental to the conduct of our business. We are not
currently a party to any legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results
of operations.

Dividend Policy

Since our inception, we have not declared or paid any dividends on our ordinary shares. We have no present plan to pay any dividends on
our ordinary shares in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Any
future determination to pay dividends will be made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings,
capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS
holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares,
if any, will be paid in U.S. dollars.

We
are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we will rely on dividends distributed by our
PRC
subsidiary. Certain payments from our PRC subsidiary to us are subject to PRC taxes, such as withholding income tax. In addition, regulations in the PRC currently permit payment of dividends of a PRC
company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. Our PRC
subsidiary is required to set aside at least 10% of its after tax profit based on PRC accounting standards every year to a statutory common reserve fund until the aggregate amount of such reserve fund
reaches 50% of the registered capital of such subsidiary. Allocations to this statutory fund can only be used for specific purposes and are not transferable to the company's shareholders in the form
of loans, advances or dividends. See "Item 3. Key Information  Risk Factors  Risk
Factors  Restrictions under PRC law on our PRC subsidiary's ability to make dividend payments and other distributions could materially and adversely affect our
ability to make investments or acquisitions, pay dividends or other distributions to you, and otherwise fund and conduct our other businesses."

B.    Significant Changes

We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

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ITEM 9.    THE OFFER AND LISTING

A.    Offer and Listing Details.

Our ADSs, each representing two of our ordinary shares, have been listed on the New York Stock Exchange since November 2, 2010 under the symbol
"XUE." The table below shows, for the periods indicated, the high and low market prices on the New York Stock Exchange for our ADSs as of May 20, 2011.

Sales priceHigh

LowAnnual highs and lows2010


14.73


8.86Quarterly highs and lowsFourth quarter 2010


14.73


8.86First Quarter 2011


11.43


8.00Monthly highs and lowsNovember 2010


14.73


10.43December 2010


12.50


8.86January 2011


11.43


9.58February 2011


10.13


8.00March 2011


9.82


8.16April 2011


11.57


9.50May


11.46


10.56


B.    Plan of Distribution

Not applicable.

C.    Markets

Our ADSs, each representing two of our ordinary shares, have been listed on the New York Stock Exchange since November 2, 2010 under the
symbol "XUE."

D.    Selling Shareholders

Not applicable.

E.    Dilution

Not applicable.

F.     Expenses of the Issue

Not applicable.

ITEM 10.    ADDITIONAL INFORMATION

A.    Share Capital

Not applicable.

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B.    Memorandum and Articles of Association

We incorporate by reference into this annual report the description of our third amended and restated memorandum of association contained in our
F-1 registration statement (File No. 333-169971), as amended, initially filed with the Commission on October 15, 2010. Our shareholders adopted our third
amended and restated memorandum and articles of association by unanimous resolutions on October 8, 2010.

C.    Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in "Item 4. Information on the
Company" or elsewhere in this annual report.

D.    Exchange Controls

See "Item 4.  Information on the Company  Business
Overview  Regulation  Regulations on Foreign Exchange."

E.    Taxation

The following summary of the material Cayman Islands, People's Republic of China and United States federal income tax consequences of an investment in our
ADSs or common shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all
possible tax consequences relating to an investment in our ADSs or common shares, such as the tax consequences under state, local and other tax laws.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there
is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be
applicable on instruments executed in, brought within or produced before a court in, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no
exchange control regulations or currency restrictions in the Cayman Islands.

Hong Kong Taxation

The following is a summary of the material Hong Kong tax consequences of the ownership of the ADSs by an investor that holds the ADSs
as capital assets. This summary does not purport to address all possible tax consequences of the ownership of the ADSs and does not take into account the specific circumstances of any particular
purchasers, some of which may be subject to special rules. This summary is based on the tax laws of Hong Kong as in effect on the date of this annual report.

Hong Kong profits tax

An ADS holder would be liable for profits tax in Hong Kong for its purchase and sale of the ADSs if the following three conditions
are satisfied:



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If
a liability arises, the normal profits tax rates applicable to corporations (for the year of assessment of 2009/2010) is 16.5% and the normal profits tax rates applicable to
individual (for the year of assessment of 2009/2010) is 15%.

Dividends received on ADSs

According to the current tax practice of the Hong Kong Inland Revenue Department, dividends paid by us on ADSs would not be subject to
any Hong Kong tax, even if received by investors in Hong Kong.

Capital gains from the sale of ADSs

There is no tax on capital gains in Hong Kong. Any gains derived from the disposal of the ADSs acquired by the Investor for
long-term investment will not be taxable in Hong Kong.

Stamp duty

No Hong Kong stamp duty is payable on the purchase and sale of the ADSs.

People's Republic of China Taxation

We are a holding company incorporated in the Cayman Islands and we may gain substantial income by way of dividends from our PRC
subsidiary. The EIT Law and the EIT Implementation Rules, both of which became effective on January 1, 2008, provide that China-sourced income of foreign enterprises, such as dividends paid by
a PRC subsidiary to its foreign investor, will normally be subject to PRC withholding tax at a rate of 10%, unless any such foreign investor's jurisdiction of incorporation has an applicable tax
treaty with China that provides for a different withholding arrangement.

Under
the EIT Law and the EIT Implementation Rules, an enterprise established outside of the PRC with "de factomanagement bodies" within
the PRC is considered a resident enterprise and is subject to enterprise income tax at the rate of 25% on its global income. The EIT Implementation Rules define the term "de facto management bodies"
as "establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise." The State
Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management
Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the "de facto management body" of a Chinese-controlled offshore
incorporated enterprise is located in China. However, Circular 82 applies only to offshore enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our company.
Currently there are no further detailed rules or precedents applicable to us governing the procedures and specific criteria for determining "de facto management body" for the
company of our type. If the PRC authorities were to subsequently determine, or any future regulation provides, that we should be treated as a PRC resident enterprise, we would be subject to a 25%
enterprise income tax on our global income, which will significantly increase our tax burden and could materially and adversely affect our financial condition and results of operations.

Therefore,
if we are regarded as a PRC resident enterprise, the amount of dividends, if any, we may pay to our shareholders and ADS holders may be decreased, although dividends
distributed from our PRC subsidiary of Xuecheng Century to us could be exempted from the PRC dividend withholding

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tax,
since such income is exempted under the EIT Law and the EIT Implementation Rules to a PRC resident recipient. If we are considered a PRC resident enterprise for enterprise income tax purposes,
dividends we pay with respect to our ADSs or ordinary shares may be considered income derived from sources within the PRC and subject to PRC withholding tax of 10%. In addition, non-PRC
shareholders may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether
our non-PRC shareholders would be able to claim the benefits of any tax treaties between their tax residence and the PRC in the event that we are considered as a PRC resident enterprise.

See
"Item 3. Key Information  Risk Factors  Risk
Factors  Relating to Doing Business in China Under the EIT Law, we may be classified as a "resident enterprise" of China. Such classification would likely result
in unfavorable tax consequences to us and our non-PRC shareholders."

United States Federal Income Taxation

The following summary describes the material United States federal income tax consequences of the ownership of our ordinary
shares and ADSs as of the date hereof. The discussion is applicable only to United States Holders (as defined below) who hold our ordinary shares or ADSs as capital assets. As used
herein, the term "United States Holder" means a beneficial owner of an ordinary share or ADS that is for United States federal income tax purposes:



This
summary does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the
United States federal income tax laws, including if you are:



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The
discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and final and proposed regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in United States federal income tax consequences different from those discussed
below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in
accordance with their terms.

If
a partnership holds ordinary shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a
partner of a partnership holding our ordinary shares or ADSs, you should consult your tax advisors.

This
summary does not contain a detailed description of all the United States federal income tax consequences to you in light of your particular circumstances and does not address
the effects of any state, local or non-United States tax laws.If you are considering the purchase, ownership or disposition of our ordinary shares or ADSs,
you should consult your own tax advisors concerning the United States federal income tax consequences to you in light of your particular situation as well as any consequences arising under the
laws of any other taxing jurisdiction.

The
U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking
actions that are inconsistent with the claiming of foreign tax credits by United States Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax,
described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of PRC taxes and the availability of the reduced tax rate
for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS
and our company.

ADSs

If you hold ADSs, for United States federal income tax purposes, you generally will be treated as the owner of the underlying
ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to United States federal income tax.

Taxation of Dividends

Subject to the discussion under " Passive Foreign Investment Company" below, the gross amount of
distributions on the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as dividends, to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld taxes) will be includable in your gross income as ordinary income on
the day actually or constructively received by you, if you own the ordinary shares, or by the depositary, if you own ADSs. Such dividends will not be eligible for the dividends received deduction
allowed to corporations under the Code.

With
respect to non-corporate United States Holders, certain dividends received in taxable years beginning before January 1, 2013 from a qualified foreign
corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid by that corporation on shares
(or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that

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our
ADSs, but not our ordinary shares, which are listed on the New York Stock Exchange, are readily tradable on an established securities market in the United States. Thus, we believe
that dividends we pay on our ordinary shares that are represented by ADSs, but not on our ordinary shares that are not so represented, will meet such conditions required for the reduced tax rates.
There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. A qualified foreign corporation also includes a foreign corporation that
is eligible for the benefits of certain income tax treaties with the United States. In the event that we are deemed to be a PRC "resident enterprise" under the PRC tax law
(see discussion under "Item 10. Additional Information  Taxation  People's Republic of China Taxation"), we
may be eligible for the benefits of the income tax treaty between the United States and the PRC, and if we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of
whether such shares are represented by ADSs, would be subject to the reduced rates of taxation. Non-corporate United States Holders that do not meet a minimum holding period
requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as "investment income" pursuant to Section 163(d)(4) of the Code will not be
eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is
obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. You should consult
your own tax advisors regarding the application of these rules given your particular circumstances.

In
the event that we are deemed to be a PRC "resident enterprise" under the PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ADSs or
ordinary shares. Subject to certain conditions and limitations, PRC withholding taxes on dividends, if any, may
be treated as foreign taxes eligible for credit against your United States federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid to you with respect
to our ordinary shares or ADSs will be treated as income from sources outside the United States and

will
generally constitute passive category income. Furthermore, in certain circumstances, if you have held our ordinary shares or ADSs for less than a specified minimum period during
which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for any PRC withholding taxes imposed on
dividends paid on our ordinary shares or ADSs. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit
under your particular circumstances.

To
the extent that the amount of the distribution exceeds our current and accumulated earnings and profits for a taxable year, as determined under United States federal income tax
principles, the distribution will be treated first as a tax-free return of capital, causing a reduction in the adjusted basis of your ADSs or ordinary shares (thereby increasing the amount
of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of your ADSs or ordinary shares), and to the extent the amount of the distribution exceeds your tax
basis, the excess will be taxed as capital gain recognized on a sale or exchange. We do not expect to keep earnings and profits in accordance with United States federal income tax principles.
Therefore, you should expect that a distribution will generally be reported as a dividend (as discussed above).

Passive Foreign Investment Company

Based on the nature of our business and the projected composition of our income and valuation of our assets, including goodwill, we do
not expect to be a passive foreign investment company, or PFIC, for 2011 or in any future year, although there can be no assurance in this regard. Moreover, as the determination of PFIC status is
based on an annual determination that cannot be made until the close of a taxable year, and involves extensive factual investigation, including ascertaining the fair market

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value
of all of our assets on a quarterly basis and the character of each item of income we earn, all as discussed below, our U.S. counsel expresses no opinion with respect to our
PFIC status.

In
general, we will be a PFIC for any taxable year in which:



For
this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not
derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of
the other corporation's assets and receiving our proportionate share of the other corporation's income. However, it is not entirely clear how the contractual arrangements between us and our affiliated
consolidated entities will be treated for purposes of the PFIC rules. If it is determined that we do not own the stock of the affiliated consolidated entities for United States federal income
tax purposes, we would likely be treated as a PFIC.

The
determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may be a PFIC in the current or any future taxable year due to changes in our asset or
income composition. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADSs may also result in our becoming a PFIC. If we are a PFIC for any
taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules discussed below.

If
we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares, you will be subject to special tax rules with respect to any "excess distribution" received and
any gain realized from a sale or other disposition, including a pledge, of ADSs or ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual
distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as excess distributions. Under these special
tax rules:



In
addition, non-corporate United States Holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning before
January 1, 2011, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621
if you hold our ADSs or ordinary shares in any year in which we are classified as a PFIC. In addition, under recently enacted legislation, if you hold ADSs or ordinary shares in any year in which we
are a PFIC, you are required to file an annual report containing such information as the U.S. Treasury may require.

If
we are a PFIC for any taxable year during which you hold our ADSs or ordinary shares and any of our non-United States subsidiaries is also a PFIC, you would be
treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules.

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You
are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

In
certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income
under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may
be available to holders of ADSs because the ADSs are listed on the New York Stock Exchange, which constitutes a qualified exchange, although there can be no assurance that the ADSs are
"regularly traded" for purposes of the mark-to-market election. It should also be noted that only the ADSs and not our ordinary shares are listed on the New York Stock
Exchange. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, you generally will not be eligible to make a mark-to-market election if we are
or become a PFIC.

If
you make an effective mark-to-market election, you will include in each taxable year that we are a PFIC as ordinary income the excess of the fair market value
of your ADSs at the end of the year over your adjusted tax basis in the ADSs. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the ADSs over their
fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an
effective mark-to-market election, in each taxable year that we are a PFIC any
gain you recognize upon the sale or other disposition of your ADSs will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election.

Your
adjusted tax basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market
rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no
longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the
mark-to-market election, and whether making the election would be advisable in your particular circumstances.

Alternatively,
you can sometimes avoid the rules described above with respect to the stock you own in a PFIC by electing to treat such PFIC as a "qualified electing fund" under
Section 1295 of the Code. However, this option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election. You are urged to
consult your tax advisors concerning the United States federal income tax consequences of holding ADSs or ordinary shares if we are considered a PFIC in any taxable year.

Taxation of Capital Gains

For United States federal income tax purposes and subject to the discussion under " Passive Foreign
Investment Company" above, you will recognize taxable gain or loss on any sale or exchange of ADSs or ordinary shares in an amount equal to the difference between the amount realized for the ADSs or
ordinary shares and your tax basis in the ADSs or ordinary shares. Such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held
for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as
United States source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such
credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. You are urged to consult your tax advisors regarding the tax
consequences if a foreign tax is imposed on a disposition of ADSs or ordinary shares, including the availability of the foreign tax credit under your particular circumstances.

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Information reporting and backup withholding

In general, information reporting will apply to dividends in respect of our ADSs or ordinary shares and the proceeds from the sale,
exchange or redemption of our ADSs or ordinary shares that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt
recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest
income.

Any
amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your United States federal income tax liability provided the required
information is timely furnished to the Internal Revenue Service.

F.     Dividends and Paying Agents

Not applicable.

G.    Statement by Experts

Not applicable.

H.    Documents on Display

We have previously filed with the Securities and Exchange Commission our registration statement on Form F-1 (File
No. 333-169971), as amended. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we previously filed with the SEC. This
means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this
annual report.

You
may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC's Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549 and at the SEC's regional offices in New York, New York and Chicago, Illinois. You can also request copies of this annual report, including the exhibits
incorporated by reference in this annual report, upon payment of a duplicating fee, by writing information on the operation of the SEC's Public Reference Room.

The
SEC also maintains a website at www.sec.gov that contains reports and other information regarding registrants that file electronically with the SEC. Our annual report and some of the
other information submitted by us to the SEC may be accessed through this web site.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors
and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

In
accordance with NYSE Rule 203.01, we will post this annual report on our websitewww.21edu.com. In addition, we will provide
hardcopies of our annual report to shareholders, including ADS holders, free of charge upon request.

I.     Subsidiary Information

Not applicable.

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ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

Our financial statements are expressed in U.S. dollars, which is our reporting and functional currency. However, all of our
revenues and substantially all of our expenses are denominated in Renminbi. Accordingly, changes in the value of Renminbi against U.S. dollar may have a material effect on our reported and
consolidated revenues, costs and expenses, gross margin and net income. Moreover, the value of assets and liabilities denominated in Renminbi fluctuates along with changes in the
exchange rates.

The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions.
The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the revised policy, the Renminbi is permitted to fluctuate within a narrow and managed band against
a basket of certain foreign currencies. This change in policy resulted in a more than 20% appreciation of the Renminbi against the U.S. dollar in the following three years. Since
July 2008, however, the Renminbi has traded within a narrow range against the U.S. dollar. As a consequence, the Renminbi has fluctuated significantly since July 2008 against
other freely traded currencies, in tandem with the U.S. dollar. Recently, the People's Bank of China has decided to proceed further with reform of the Renminbi exchange regime and to enhance
the Renminbi exchange rate flexibility. It is difficult to predict how long the current situation may last and when and how Renminbi exchange rates may change going forward. To the extent that we need
to convert U.S. dollars we receive into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive
from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business
purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.

Considering
the amount of our cash and cash equivalents as of December 31, 2010, a 1.0% change in the exchange rate between the Renminbi and the U.S. dollar would result in
an increase or decrease of $1.4 million or $1.5 million to our total cash and cash equivalents. We have not used any forward contracts or currency borrowings to hedge our exposure to
foreign currency exchange risk.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to interest income generated by excess cash which is mostly held in
interest-bearing bank deposits. We have not used derivative financial instruments to hedge interest risk. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed,
nor do we anticipate being exposed to material risks due
to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest rates.

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.    Debt Securities

Not applicable.

B.    Warrants and Rights

Not applicable.

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C.    Other Securities

Not applicable.

D.    American Depositary Shares

Fees Paid by Our ADS Holders

As an ADS holder, you will be required to pay the following service fees to the depositary, Citibank, N.A.:

Service

Fees Issuance of ADSs

Up to U.S. 5¢ per ADS issued Cancellation of ADSs

Up to U.S. 5¢ per ADS canceled Distribution of cash dividends or other cash distributions

Up to U.S. 5¢ per ADS held Distribution of ADSs pursuant to stock dividends, free stock distributions or exercise of rights

Up to U.S. 5¢ per ADS held Distribution of securities other than ADSs or rights to purchase additional ADSs

Up to U.S. 5¢ per ADS held Depositary Services

Up to U.S. 5¢ per ADS held on the applicable record date(s) established by the Depositary Transfer of ADRs

U.S. $1.50 per certificate presented for transfer


As
an ADS holder you will also be responsible to pay certain fees and expenses incurred by the depositary and certain taxes and governmental charges
such as:



Depositary
fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued
ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their
clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of
ADSs as of the applicable ADS record date.

The
Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., stock dividend,
rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether
certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case

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of
ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the
ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients' ADSs in DTC accounts in turn charge their clients' accounts the
amount of the fees paid to the depositary banks.

In
the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set
off the amount of the depositary fees from any distribution to be made to the ADS holder.

Note
that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior notice of such changes.

Fees and Payments from the Depositary to Us

Our depositary has agreed to reimburse us for certain expenses we incur that are related to the administration and maintenance of the
ADS program. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary
collects from investors. The depositary has not reimbursed us for any expenses related to the administration and maintenance of the facility as of December 31, 2010.

112

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Table of Contents

PART II

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

See "Item 10. Additional Information" for a description of the rights of securities holders, which remain unchanged.

Our
ADSs, each representing two of our ordinary shares, have been listed on the New York Stock Exchange since November 2, 2010 under the symbol "XUE". We completed our
initial public offering of 15,444,500 ordinary shares, in the form of ADSs, at $9.50 per ADS on November 5, 2010 after our ordinary shares and American Depositary Receipts were
registered under the Securities Act. The effective date of our registration statement on Form F-1 (File number: 333-169971) was November 1, 2010. Goldman Sachs
(Asia) L.L.C. was the sold bookrunner and Robert W. Baird & Co. Incorporated and William Blair & Company, L.L.C. were the other underwriters for the initial public offering of
our ADSs.

As
of December 31, 2010, we have not used the proceeds of our initial public offering.

ITEM 15.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this annual report, an evaluation has been carried out under the supervision and with the
participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as
such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act.
Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that material information
required to be disclosed in this annual report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and
forms of the Commission.

Management's Annual Report on Internal Control Over Financial Reporting

This annual report does not include a report of management's assessment regarding internal control over financial reporting due to a
transition period established by rules of the Securities and Exchange Commission for newly public companies.

Changes in Internal Control over Financial Reporting

Before we became a public company, in connection with the preparation and external audit of our consolidated financial statements for
the year ended December 31, 2009, we and our independent registered public accounting firm determined that certain material weaknesses existed in our internal control over financial reporting
as of December 31, 2009. The material weakness identified related to our lack of accounting personnel with appropriate U.S. GAAP knowledge and lack of appropriate maintenance of
accounting and financial records. We had taken measures to address these control deficiencies during the year ended December 31, 2010. These measures included (i) hiring additional
accounting personnel with extensive experience in U.S. GAAP and SEC reporting requirements; (ii) starting from the third quarter in 2010, providing regular training sessions on an
ongoing basis to our accounting personnel that cover a broad range of accounting and financial reporting topics;

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(iii) developing
and applying a comprehensive manual with detailed guidance on accounting policies and procedures as well as procedures for maintenance and retention of accounting and financial
records. As the result of these measures, one of the two material weaknesses in our internal control over financial reporting identified as of December 31, 2009 has been remedied. The material
weakness remained as of December 31, 2010 related to our lack of accounting personnel with appropriate U.S. GAAP knowledge. To address this material weakness, we will continue hiring
additional accounting personnel with appropriate experience in U.S, GAAP and SEC reporting requirements. In addition, our key accounting personnel have enrolled in a 180-hour U.S. Certified
Public Accountant, or CPA, education program. After the completion of the program, our key accounting personnel will take the U.S. CPA exam. However, the implementation of these measures may
not fully address this material weakness in our internal control over financial reporting, and we plan to continue to address and remediate additional
control deficiencies we may identify during our evaluation process in time to meet the deadline for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. See
"Item 3.D. Risk Factors  Risks Relating to Our Business and Industry  If we fail to maintain an effective system of
internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be
adversely affected."

There
were no other changes in our internal control over financial reporting that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that Mr. Sean Shao qualifies as "audit committee financial expert" as defined in
Item 16A of Form 20-F. All of the members of our audit committee satisfy the "independence" requirements of the NYSE rules and Rule 10A-3(b)(1) under the
Exchange Act.

ITEM 16B.    CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain
provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents and any other persons who perform similar
functions for us. We have filed our code of business conduct and ethics as an exhibit to our F-1 registration statement (File No. 333-169971), as amended,
initially filed with the Commission on October 15, 2010. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days
after we receive such person's written request.

ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services
rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal external

114

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Table of Contents

auditors,
for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.

Year Ended December 31,2009

2010(in thousands of $)Audit fees(1)


110


1,298Audit-related fees(2)


10


114Tax fees


61


48Other fees


37


Total


218


1,460


(1)"Audit
fees" represent the aggregate fees billed for each of the fiscal years listed for professional services rendered by our principal auditors for the
audit of our annual financial statements or services that are normally provided by the auditors in connection with statutory and regulatory filings or engagements.(2)"Audit-related
fees" represent the aggregate fees billed in each of the fiscal years listed for assurance and related services by our principal auditors for
services rendered that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit fees". Services comprising the fees
disclosed under the category of "Audit-related fees" involve principally limited reviews performed on our consolidated financial statements.


The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu
CPA Ltd., including audit services, audit-related services, tax services and other services as described above, other than those forde minimusservices which are approved by the Audit Committee prior to the completion of the audit.

ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

None.

ITEM 16F.    CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.

Not applicable.

ITEM 16G.    CORPORATE GOVERNANCE.

We are a "foreign private issuer" (as such term is defined in Rule 3b-4 under the Exchange Act), and
our ADSs, each representing two ordinary share, are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York
Stock Exchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New York Stock
Exchange with limited exceptions. The following summarizes some significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing
standards of the New York Stock Exchange.

Under
the listing standards of the New York Stock Exchange, domestic companies are required to have a nominating/corporate governance committee, composed entirely of independent
directors. In addition to identifying individuals qualified to become board members, the nominating/corporate governance committee must develop and recommend to the board a set of corporate governance
principles. We do not have a nominating/corporate governance committee, and the Companies Law of the Cayman Islands does not require companies incorporated in Cayman Islands to have a
nominating/corporate governance committee. Currently, our board of directors performs the duties of the nominating/corporate governance committee and regularly reviews our corporate governance
principles and practice.

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PART III

ITEM 17.    FINANCIAL STATEMENTS.

We have elected to provide financial statements pursuant to Item 18.

ITEM 18.    FINANCIAL STATEMENTS.

The following financial statements are filed as part of this annual report, together with the report of the independent
auditors:



ITEM 19.    EXHIBITS.

Exhibit
Number

Description of Document1.1
*
Third Amended and Restated Memorandum and Articles of Association of the Registrant as currently in effect2.1
*
Form of Ordinary Share Certificate2.2

Form of Deposit Agreement between the Registrant and Citibank, N.A., as depositary2.3

Form of American depositary receipt evidencing American depositary shares (included in Exhibit 2.2)2.4
*
Shareholders Agreement, dated as of August 28, 20094.1
*
Form of Indemnification Agreement between the Registrant and its directors4.2
*
Form of Employment Agreement between the Registrant and its executive officers4.3
*
English translation of Amended and Restated Exclusive Technology Consulting and Management Service Agreement between Xuecheng Century (Beijing) Information Technology Co., Ltd. and Beijing Xueda Information
Technology Co., Ltd.4.4

English translation of Amended and Restated Pledge Agreement between Xuecheng Century (Beijing) Information Technology Co., Ltd. and shareholders of Beijing Xueda Information Technology Co.,
 Ltd.4.5
*
English translation of Amended and Restated Exclusive Purchase Right Contract between Xuecheng Century (Beijing) Information Technology Co., Ltd. and shareholders of Beijing Xueda Information
Technology Co., Ltd.4.6
*
English translations of form of powers of attorney granted by shareholders of Beijing Xueda Information Technology Co. Ltd. in favor of Xuecheng Century (Beijing) Information Technology Co.,
 Ltd.4.7
*
Xueda Education Group Amended and Restated 2009 Equity Incentive Plan


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Exhibit
Number

Description of Document4.8
*
Subscription Agreement, dated as of October 20, 2010, between the Registrant and WP X Investments IV Ltd.4.9
*
Investor and Registration Rights Agreement, dated as of October 20, 2010, between the Registrant and WP X Investment IV Ltd.8.1

List of Subsidiaries11.1

Code of Business Conduct and Ethics12.1

CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2

CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1

Consent of Deloitte Touche Tohmatsu CPA Ltd.


*Previously
filed with the Registration Statement on Form F-1 (File No. 333-169971), as amended.Previously
filed with the Registration Statement on Form F-6 (File No. 333-169976), as amended.


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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Xueda Education GroupBy:

/s/ XIN JINName:

Xin JinTitle:

Chief Executive Officer and DirectorDate: May 21, 2011


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XUEDA EDUCATION GROUP    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



CONTENTS

PAGEREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-2CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2010

F-3CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

F-5CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED
DECEMBER 31, 2008, 2009 AND 2010

F-6CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010

F-7NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-8


F-1

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Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO
THE BOARD OF DIRECTORS AND SHAREHOLDERS OFXUEDA EDUCATION GROUP

We
have audited the accompanying consolidated balance sheets of Xueda Education Group (the "Company"), its subsidiaries, its variable interest entity ("VIE"), and its VIE's subsidiaries
(collectively, the "Group") as of December 31, 2009 and 2010 and the related consolidated statements of operations, shareholders' equity and comprehensive (loss) income, and cash flows for each
of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Group's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2009 and 2010 and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States
of America.

/s/
Deloitte Touche Tohmatsu CPA Ltd.
Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People's Republic of China
May 23, 2011

F-2

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Table of Contents



XUEDA EDUCATION GROUP        CONSOLIDATED BALANCE SHEETS        (In thousands of U.S. dollars, except for shares and per share data)

December 31,2009

2010AssetsCurrent assets:Cash and cash equivalents


36,436


211,370Term deposits


732


21,212Prepaid expenses and other current assets


4,587


8,398Amounts due from related parties


770


41Deferred tax assets


68


1,889Total current assets


42,593


242,910Property and equipment, net


3,555


15,775Deferred tax assets


51


659Rental deposits


1,258


2,391Goodwill


796


823Other non-current assets


70


624Total assets


48,323


263,182LiabilitiesCurrent liabilities:Deferred revenue-current (including deferred revenue of the consolidated VIE without recourse to the Company of $41,529 and $61,161 as of
December 31, 2009 and 2010, respectively)


41,529


61,161Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIE without recourse to the
Company of $5,640 and $10,184 as of December 31, 2009 and 2010, respectively)


5,640


11,815Income taxes payable (including income taxes payable of the consolidated VIE without recourse to the Company of $640 and $2,120 as of December 31,
2009 and 2010, respectively)


640


2,120Other taxes payable (including other taxes payable of the consolidated VIE without recourse to the Company of $1,000 and $1,473 as of December 31,
2009 and 2010, respectively)


1,000


2,374Total current liabilities


48,809


77,470Deferred revenue-noncurrent (including deferred revenue of the consolidated VIE without recourse to the Company of $16,454 and $25,020 as of
December 31, 2009 and 2010, respectively)


16,454


25,020Deferred tax liabilities (including deferred tax liabilities of the consolidated VIE without recourse to the Company of $36 and $nil as of December 31,
 2009 and 2010, respectively)


36


Total liabilities


65,299


102,490


F-3

---



Table of Contents

XUEDA EDUCATION GROUP

CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands of U.S. dollars, except for shares and per share data)

December 31,2009

2010Commitments (Note 17)Series A1 convertible redeemable preferred shares (par value $0.0001 per share; 21,555,920 shares authorized and issued, 21,555,920 and nil
shares outstanding as of December 31, 2009 and 2010, respectively)


3,037


Series A2 convertible redeemable preferred shares (par value $0.0001 per share; 8,796,920 shares authorized and issued, 8,796,920 and nil
shares outstanding as of December 31, 2009 and 2010, respectively)


1,103


EquityOrdinary shares (par value $0.0001per share; 469,647,160 shares authorized; 69,962,800 and 138,328,640 shares issued and outstanding as of
December 31, 2009 and 2010, respectively)


7


14Additional paid-in capital


1,246


173,616Subscription receivable





(155
)Statutory reserves


144


523Accumulated deficits


(21,690
)

(12,296
)Accumulated other comprehensive loss


(823
)

(1,010
)Total Xueda Education Group shareholders' equity


(21,116
)

160,692Total liabilities, convertible redeemable preferred shares and equity


48,323


263,182


See
notes to consolidated financial statements.

F-4

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Table of Contents



XUEDA EDUCATION GROUP        CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands of U.S. dollars, except for shares and per share data)

Years ended December 31,2008

2009

2010Net revenues


34,106


77,188


154,144Cost of revenues (including share-based compensation expenses of $nil, $nil and $3 for 2008, 2009 and 2010)


(31,945
)

(57,326
)

(103,504
)Gross profit


2,161


19,862


50,640Operating expenses:General and administrative (including share-based compensation expenses of $nil, $nil and $1,895 for 2008, 2009 and 2010)


(6,871
)

(9,912
)

(23,790
)Selling and marketing (including share-based compensation expenses of $nil, $nil and $6 for 2008, 2009 and 2010)


(7,271
)

(10,624
)

(16,179
)Total operating expenses


(14,142
)

(20,536
)

(39,969
)Government subsidies


52


83


26Other income








76(Loss) income from operations


(11,929
)

(591
)

10,773Interest income


24


220


510(Loss) income before income tax expenses


(11,905
)

(371
)

11,283Income tax expenses


(547
)

(1,237
)

(990
)Net (loss) income


(12,452
)

(1,608
)

10,293Deemed dividend on Series A1 convertible redeemable preferred sharesaccretion of redemption premium


(257
)

(367
)

(382
)Deemed dividend on Series A2 convertible redeemable preferred sharesaccretion of redemption premium


(112
)

(150
)

(138
)Deemed dividend on Series A1 convertible redeemable preferred sharesbeneficial conversion feature





(460
)

Net (loss) income attributable to Xueda Education Group ordinary shareholders


(12,821
)

(2,585
)

9,773Net (loss) income per ordinary share:Net (loss) income attributable to Xueda Education Group ordinary shareholdersBasic


(0.19
)

(0.04
)

0.09Diluted


(0.19
)

(0.04
)

0.09Weighted average shares used in calculating net (loss) income per ordinary shareBasic


66,670,000


68,865,200


80,407,581Diluted


66,670,000


68,865,200


82,776,366


See
notes to consolidated financial statements.

F-5

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Table of Contents



XUEDA EDUCATION GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME
(In thousands of U.S. dollars, except for shares and per share data)

Ordinary









Accumulated
other
comprehensive
lossAdditional
paid-in
capital

Subscription
receivable

Statutory
reserve

Accumulated
deficits

Total
equity

Total
comprehensive
(loss)/incomeShares

AmountBalance at January 1, 2008


66,670,000


7


274








(6,140
)

(270
)

(6,129
)Deemed dividend on Series A1 convertible redeemable preferred sharesaccretion of redemption premium

















(257
)




(257
)Deemed dividend on Series A2 convertible redeemable preferred sharesaccretion of redemption premium

















(112
)




(112
)Foreign currency translation adjustments




















(552
)

(552
)

(552
)Net loss

















(12,452
)




(12,452
)

(12,452
)Balance at December 31, 2008


66,670,000


7


274








(18,961
)

(822
)

(19,502
)

(13,004
)Deemed dividend on Series A1 convertible redeemable preferred sharesaccretion of redemption premium

















(367
)




(367
)Deemed dividend on Series A2 convertible redeemable preferred sharesaccretion of redemption premium

















(150
)




(150
)Deemed dividend on Series A1 convertible redeemable preferred sharesbeneficial conversion feature








460








(460
)




Conversion of Series A1 convertible redeemable preferred shares


3,126,920





356














356Conversion of Series A2 convertible redeemable preferred shares


1,373,080





156














156Repurchase and cancellation of shares


(1,207,200
)



















Provision for statutory reserve














144


(144
)




Foreign currency translation adjustments




















(1
)

(1
)

(1
)Net loss

















(1,608
)




(1,608
)

(1,608
)Balance at December 31, 2009


69,962,800


7


1,246





144


(21,690
)

(823
)

(21,116
)

(1,609
)Deemed dividend on Series A1 convertible redeemable preferred sharesaccretion of redemption premium

















(382
)




(382
)Deemed dividend on Series A2 convertible redeemable preferred sharesaccretion of redemption premium

















(138
)




(138
)Provision for statutory reserve














379


(379
)




Share-based compensation








1,904














1,904Conversion of Series A1 and A2 preferred shares upon the completion of the initial public offering ("IPO")


30,352,840


3


4,657














4,660Issuance of ordinary shares upon the completion of IPO (net of issuance cost of $3,464)


30,889,000


3


132,986


(155
)










132,834Issuance of ordinary shares to Warburg Pincus (net of issuance cost of $nil)


7,124,000


1


32,823














32,824Foreign currency translation adjustments




















(187
)

(187
)

(187
)Net income

















10,293





10,293


10,293Balance at December 31, 2010


138,328,640


14


173,616


(155
)

523


(12,296
)

(1,010
)

160,692


10,106


See notes to consolidated financial statements.

F-6

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XUEDA EDUCATION GROUP        CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands of U.S. dollars)

Years ended December 31,2008

2009

2010Cash flows from operating activities:Net (loss) income


(12,452
)

(1,608
)

10,293Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation and amortization of property and equipment


625


1,087


3,551Loss on disposal of property, plant and equipment





6


24Share-based compensation expense








1,904Interest income from term deposits





(102
)

(226
)Deferred income taxes





(83
)

(2,404
)Changes in assets and liabilities:Prepaid expenses and other current assets


(2,049
)

(1,026
)

(2,298
)Amounts due from related parties





(568
)

749Rental deposits


(667
)

(158
)

(1,051
)Deferred revenue


17,558


26,001


25,846Accrued expenses and other current liabilities


1,924


2,138


4,432Income tax payable


(277
)

576


1,405Other non-current assets


2


9


(548
)Other taxes payable


202


475


1,290Net cash provided by operating activities


4,866


26,747


42,967Cash flows from investing activities:Proceeds from maturity of term deposits





8,886


742Net cash acquired on acquisition of business with deferred consideration





129


Proceeds from disposal of property and equipment





6


6Purchase of property and equipment


(2,464
)

(2,257
)

(15,419
)Purchase of term deposits





(9,516
)

(20,850
)Net cash used in investing activities


(2,464
)

(2,752
)

(35,521
)Cash flows from financing activities:Proceeds from IPO








136,299Payment of issuance cost in connection with IPO








(2,732
)Proceeds from issuance of ordinary shares to Warburg Pincus








32,824Proceeds from issuance of Series A1 convertible preferred shares


2,269


500


Proceeds from issuance of Series A2 convertible preferred shares


997





Payment of deferred consideration for acquisition of Taiyuan Xueda








(235
)Net cash provided by financing activities


3,266


500


166,156Effect of exchange rate changes


538


11


1,332Net increase in cash and cash equivalents


6,206


24,506


174,934Cash and cash equivalents, beginning of year


5,724


11,930


36,436Cash and cash equivalents, end of year


11,930


36,436


211,370Supplemental disclosure of cash flow informationIncome taxes paid


1,308


409


1,975


See
notes to consolidated financial statements.

F-7

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Table of Contents



XUEDA EDUCATION GROUP        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010  (In thousands of U.S. dollars,
except for shares and per share data)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES



Name

Incorporation
or acquisition
date

Place of
establishment/
incorporation

Legal
ownership%Subsidiaries:Xuecheng Century (Beijing) Information Technology Co., Ltd.


Aug 17, 2009

PRC


100
%China Xueda Corporation Limited


May 13, 2009

Hong Kong


100
%VIE:Beijing Xueda Information Technology Co., Ltd.


Jul 13, 2009

PRC


0
%*VIE's subsidiaries:Beijing Xuecheng Shidai Information Technology Co., Ltd.


Oct 28, 2009

PRC


0
%*Baoding Xueda Chengcai Information Technology Co., Ltd.


Apr 23, 2010

PRC


0
%*Baotou Xueda Information Technology Co., Ltd.


Aug 1, 2010

PRC


0
%*Beijing Dongcheng Xueda Training School(1)


May 27, 2010

PRC


0
%*Beijing Xicheng Xueda Training School(1)


Feb 1, 2010

PRC


0
%*Beijing Xuemeng Century Education Consulting Co., Ltd.


Dec 24, 2009

PRC


0
%*Changchun Xueda Education & Training School(1)


Jun 11, 2010

PRC


0
%*Changsha Xian Xueda Education & Training School(1)


Jul 20, 2010

PRC


0
%*Changsha Xuezhi Information Technology Co., Ltd.


Nov 3, 2009

PRC


0
%*Changzhou Xueda Education Information Technology Co., Ltd.


Dec 22, 2009

PRC


0
%*Chengdu Chenghua Xueda Education & Training School(1)


Jul 23, 2010

PRC


0
%*Chengdu Xueda Information Technology Co., Ltd.


Nov 30, 2009

PRC


0
%*Chongqing Shapingba Xueda Education & Training School(1)


Jul 8, 2010

PRC


0
%*Chongqing Xueda Information Technology Co., Ltd.


Nov 2, 2009

PRC


0
%*Cixi Xueda Education & Training School(1)


Jun 9, 2010

PRC


0
%*Dalian Shahekou Xueda Education & Training School(1)


Mar 5, 2010

PRC


0
%*Dongguan Dongcheng Xueda Training Center(1)


Nov 12, 2010

PRC


0
%*Dongguan Nancheng Xueda Training Center(1)


Nov 3, 2010

PRC


0
%*Dongguan Xueda Information Technology Co., Ltd.


Dec 2, 2009

PRC


0
%*Foshan Chancheng District Xueda Education Training Center(1)


Jul 1, 2010

PRC


0
%*Fuzhou Cangshan District Jinshan Xueda Education Training Center(1)


Sep 30, 2010

PRC


0
%*Fuzhou Gulou Xueda Education & Training School(1)


Apr 26, 2010

PRC


0
%*


F-8

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)

Name

Incorporation
or acquisition
date

Place of
establishment/
incorporation

Legal
ownership%Fuzhou Xueda Educational Consulting Co., Ltd.


Nov 6, 2009

PRC


0
%*Guangzhou Panyu District Xueda Education Training Center(1)


Oct 27, 2010

PRC


0
%*Guangzhou Haizhu Xueda Education & Training School(1)


Aug 16, 2010

PRC


0
%*Guangzhou Xueda Educational Technology Co., Ltd.


Nov 24, 2009

PRC


0
%*Guiyang Xueda Information Technology Co., Ltd.


Apr 9, 2010

PRC


0
%*Hangzhou Xueda Education Consulting Co., Ltd.


Mar 9, 2010

PRC


0
%*Hangzhou Xuezhi Information Technology Co., Ltd.


Oct 20, 2009

PRC


0
%*Harbin Xueda Information Technology Co., Ltd.


Oct 13, 2009

PRC


0
%*Hefei Xueda Education Training Department(1)


Dec 27, 2010

PRC


0
%*Hefei Xueda Information Technology Co., Ltd.


Oct 12, 2009

PRC


0
%*Hohhot Xueda Information Technology Co., Ltd.


Oct 21, 2009

PRC


0
%*Huizhou Xueda Information Technology Co., Ltd.


Jul 1, 2010

PRC


0
%*Jilin Xueda Education Individualized Learning Center(1)


Nov 20, 2009

PRC


0
%*Jinan Xuecheng Education & Training School(1)


Dec 17, 2009

PRC


0
%*Kunming Guandu Xueda Education & Training School(1)


Aug 2, 2010

PRC


0
%*Kunming Panlong Xueda Education & Training School(1)


Aug 4, 2010

PRC


0
%*Kunming Wuhua Xueda Personalized Education Training School(1)


Nov 24, 2010

PRC


0
%*Kunming Xishan Xueda Education & Training School(1)


Jul 29, 2010

PRC


0
%*Kunming Xueda Information Technology Co., Ltd.


Nov 6, 2009

PRC


0
%*Langfang Xueda Computer Network Technology Co., Ltd.


Oct 22, 2010

PRC


0
%*Lanzhou Xueda Information Technology Co., Ltd.


Oct 29, 2009

PRC


0
%*Luoyang Jianxi Xueda Education & Training School(1)


Aug 9, 2010

PRC


0
%*Nanchang Xueda Education & Training School(1)


Apr 20, 2009

PRC


0
%*Nanjing Xueda Education & Training School(1)


Sep 30, 2010

PRC


0
%*Nanjing Xueda Information Technology Co., Ltd.


Oct 30, 2009

PRC


0
%*Nanning Qingxiu Xueda Education & Training School(1)


Sep 20, 2010

PRC


0
%*Nanning Xuecheng Information Technology Co., Ltd.


Dec 2, 2009

PRC


0
%*Nantong Chongchuan District Xueda Education Training School(1)


Nov 19, 2010

PRC


0
%*Ningbo Xueda Education & Training School(1)


Dec 29, 2009

PRC


0
%*Ningbo Xueda Information Technology Co., Ltd.


Oct 15, 2009

PRC


0
%*Qingdao Xueda Information Technology Co., Ltd.


Nov 30, 2009

PRC


0
%*Qingdao Xueda Pre-exam Tutoring School(1)


May 18, 2009

PRC


0
%*Shaanxi Xueda Information Technology Co., Ltd.


Oct 29, 2009

PRC


0
%*Shandong Xueda Information Technology Co., Ltd.


Aug 24, 2009

PRC


0
%*Shanghai Jinshan District Xueda Education School of Continuing Studies(1)


Nov 1, 2010

PRC


0
%*


F-9

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)

Name

Incorporation
or acquisition
date

Place of
establishment/
incorporation

Legal
ownership%Shanghai Xueda Information Technology Co., Ltd.


Oct 20, 2009

PRC


0
%*Shaoxing Xueda Information Technology Co., Ltd.


Apr 16, 2010

PRC


0
%*Shenyang Xueda Education & Training School(1)


Aug 10, 2010

PRC


0
%*Shenyang Xueda Information Technology Co., Ltd.


Oct 26, 2009

PRC


0
%*Shenzhen Xueda Information Technology Co., Ltd.


Nov 25, 2009

PRC


0
%*Shijiazhuang Xueda Chengcai Information Technology Co., Ltd.


Oct 16, 2009

PRC


0
%*Shijiazhuang Yuhua District Xueda Education & Training School(1)


Apr 26, 2010

PRC


0
%*Suzhou Xuecheng Information Technology Co., Ltd.


Sep 28, 2009

PRC


0
%*Taiyuan Xueda Education & Training School(1)


Dec 8, 2008

PRC


0
%*Tangshan Xueda Technology Co., Ltd.


Dec 7, 2009

PRC


0
%*Tianjin Xueda Educational Information Consulting Co., Ltd.


Oct 26, 2009

PRC


0
%*Wenzhou Xueda Chengcai Information Technology Co., Ltd.


Dec 28, 2009

PRC


0
%*Wuhan Xueda Information Technology Co., Ltd.


Oct 12, 2009

PRC


0
%*Wuxi Xueda Information Technology Co., Ltd.


Oct 15, 2009

PRC


0
%*Xi'an Beilin District Xueda Education Training School(1)


Dec 14, 2010

PRC


0
%*Xi'an Lianhu Xueda Education Training School(1)


Dec 7, 2010

PRC


0
%*Xi'an Xueda Education & Training School(1)


Jun 18, 2010

PRC


0
%*Yinchuan Xueda Education Training School(1)


Oct 25, 2010

PRC


0
%*Yinchuan Xueda Information Technology Co., Ltd.


Jun 3, 2010

PRC


0
%*Yuci Xueda Education Training School(1)


Sep 3, 2010

PRC


0
%*Zhengzhou Xueda Education Consulting Co., Ltd.


Oct 27, 2009

PRC


0
%*


*These
entities are controlled by the Company pursuant to the contractual arrangements disclosed below.(1)These
private schools are established and controlled by Beijing Xueda Information Technology Co., Ltd. or its subsidiaries. Under PRC
laws and regulations, entities who establish private schools are commonly referred to as "sponsors" instead of "owners" or "shareholders." The economic substance of "sponsorship" in respect of
private schools is substantially similar to that of ownership with respect to legal, regulatory and tax matters.




F-10

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Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)



Beneficial owners

Percentage
of ownership%Rubin Li


33.00Xin Jin


38.00Jinbo Yao


22.00Changyong Zhu


4.00Qiang Deng


3.00Total


100.00




Beneficial owners

Percentage
of ownership
in ordinary
share interest

Percentage
of ownership
on an as
converted basis%

%Rubin Li


33.00


22.00Xin Jin


38.00


25.33Jinbo Yao


22.00


14.67Changyong Zhu


4.00


2.67Qiang Deng


3.00


2.00Century Hui Ce





10.17CDH Xueda Education





23.16Total


100.00


100.00




F-11

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)



Beneficial owners

Percentage
of ownership
in ordinary
share interest

Percentage
of ownership
on an as
converted basis%

%Rubin Li


33.00


22.00Xin Jin


38.00


25.33Jinbo Yao


22.00


14.67Changyong Zhu


4.00


2.67Qiang Deng


3.00


2.00Century Hui Ce





10.17CDH Xueda Education





23.16Total


100.00


100.00




F-12

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)







F-13

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Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)



F-14

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)



As of December 31,2009

2010Cash and cash equivalents


35,952


38,695Prepaid expense and other current assets


4,587


6,834Total current assets


42,117


68,671Total assets


47,846


87,925Deferred revenue


57,983


86,181Total current liabilities


48,809


75,124Total liabilities


65,299


100,144Total equity


(21,088
)

(12,219
)




For the year ended December 31,2008

2009

2010Net revenues


34,106


77,188


155,019Net (loss) income


(12,452
)

(1,592
)

3,550Net cash provided by operating activities


4,866


26,763


35,510Net cash used in investing activities


(2,464
)

(2,752
)

(34,374
)Net cash provided by financing activities


3,266





353Effects of exchange rate changes


538


11


1,254


F-15

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

1.     ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)



2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



F-16

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data) (Continued)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Furniture, fixtures and equipment

3 yearsMotor vehicles

5 yearsLeasehold improvements

Shorter of useful life of the assets or the lease term


F-17

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)







F-18

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



F-19

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



F-20

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



3.     RECENTLY ISSUED ACCOUNTING STANDARDS



F-21

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

3.     RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)



F-22

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

3.     RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)



4.     ACQUISITION



Cash

$
334Other receivable


513Property and equity, net


9Deferred revenue and other liabilities assumed


(1,212
)Goodwill


796Total

$
440


F-23

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

4.     ACQUISITION (Continued)



For the years ended December 31,2008

2009(unaudited)

(unaudited)Net loss attributable to XuedaEducation Group shareholders


(13,004
)

(2,585
)Loss per sharebasic


(0.20
)

(0.04
)Loss per sharediluted


(0.20
)

(0.04
)


5.     PREPAID EXPENSES AND OTHER CURRENT ASSETS



December 31,2009

2010Prepaid rental expense


1,353


3,213Prepaid advertisement expense


327


469Prepayment for property and equipment


159


1,129Staff advances and others


1,094


960Other receivable (i)


656


1,712Business tax prepaid


887


379Short-term deposits (ii)


111


5364,587


8,398


(i)Other receivable represented cash that had been received from students but held by the electronic payment services
company as of December 31, 2010, which was fully received by the Company in January 2011.(ii)Short-term deposits represented the deposits paid for property management, office equipment and other
miscellaneous purposes relating to leased offices.


F-24

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

6.     PROPERTY AND EQUIPMENT, NET



December 31,2009

2010Buildings





1,530Furniture, fixtures and equipment


1,863


6,888Motor vehicles


635


1,218Leasehold improvements


2,920


11,682Less: accumulated depreciation and amortization


(1,863
)

(5,543
)3,555


15,775




7.     GOODWILL



Balance as of December 31, 2008


Acquisition of Taiyuan Xueda


796Balance as of December 31, 2009


796Effects of foreign currency exchange difference


27Balance as of December 31, 2010


823




F-25

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

8.     ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



December 31,2009

2010Accrued rental expenses


486


564Accrued employee payroll and welfare benefits


4,381


8,368Accrued advertisement expense


194


182Payable for property and equipment


152


1,103Acquisition consideration payable


235


Accrued professional service fee (i)





961Accrued other service fee (ii)





284Other (iii)


192


3535,640


11,815


(i)Accrued professional service fee related to accounting, legal and consulting services provided by third parties
primarily related the Company's IPO completed in November 2010.(ii)Accrued other service fee represented the service fee accrued for the electronic payment services, which the Group
started using in 2010, as of December 31, 2010.(iii)Other represented primarily payables to contractors for leasehold
improvements.


9.     OTHER TAXES PAYABLE



December 31,2009

2010Business taxes and other tax payable


785


1,990Individual income taxes payable


215


3841,000


2,374




F-26

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

10.   INCOME TAXES



Year ended December 31,2008

2009

2010Current:PRC


547


1,320


3,455Deferred:PRC





(83
)

(2,465
)Total income taxes


547


1,237


990




Year ended December 31,2008

2009

2010Income tax expenses:Current


547


1,320


3,455Deferred





(83
)

(2,465
)547


1,237


990


F-27

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

10.   INCOME TAXES (Continued)



Year ended December 31,2009

2010Current deferred tax assetsDeferred revenue


2,481


Accrued expenses


328


1,975Less: Valuation allowance


(2,741
)

(86
)Net current deferred tax assets


68


1,889Non-current deferred tax assetsNet operating loss carry forwards


2,241


1,030Less: valuation allowance


(2,190
)

(371
)Net non-current deferred tax assets


51


659Non-current deferred tax liabilitiesProperty and equipment


36


Net non-current deferred tax liabilities


36







F-28

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

10.   INCOME TAXES (Continued)



Year ended December 31,2008

2009

2010Expected income tax expense at PRCEIT statutory rate of 25%


(2,976
)

(98
)

2,821Effect of preferential tax rate and tax holiday





(60
)

(2,608
)Effect on tax rates in different tax jurisdiction





(4
)

(122
)Tax effect of expenses that are not deductible in determining taxable profit


1,181


525


161Changes in valuation allowance


2,342


874


738Total income tax expense


547


1,237


990




F-29

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

10.   INCOME TAXES (Continued)



11.   GOVERNMENT SUBSIDIES



12.   ORDINARY SHARES



F-30

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

13.   NET (LOSS) INCOME PER SHARE



For the years December 31,2008

2009

2010Net (loss) income-basic (numerator):Net (loss) income allocated to Xueda Education Group shareholders


(12,821
)

(2,585
)

9,773Net (loss) income allocated to Series A1 preferred shareholders








1,678Net (loss) income allocated to Series A2 preferred shareholders








685Net (loss) income allocated ordinary shareholders


(12,821
)

(2,585
)

7,410Shares (denominator):Weighted average ordinary shares outstanding used in computing basic net (loss) income per sharebasic


66,670,000


68,865,200


80,407,581Weighted average ordinary shares outstanding used in computing diluted loss(loss) income per sharediluted


66,670,000


68,865,200


82,776,366Net (loss) income per ordinary sharebasic


(0.19
)

(0.04
)

0.09Net (loss) income per ordinary sharediluted


(0.19
)

(0.04
)

0.09




F-31

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

13.   NET (LOSS) INCOME PER SHARE (Continued)



December 31,2008

2009

2010Number of Series A1 convertible redeemable preferred shares outstanding


23,160,000


21,555,920


Number of Series A2 convertible redeemable preferred shares outstanding


10,170,000


8,796,920





14.   SHARE-BASED COMPENSATION



F-32

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

14.   SHARE-BASED COMPENSATION (Continued)



Outstanding optionsNumber of options

Weighted average exercise price

Weighted average grant-date fair valueOptions outstanding at January 1, 2010




$


$
Granted


13,663,942

$
1.21

$
1.24Cancelled


(3,354,880
)
$
0.99

$
1.24Options outstanding at December 31, 2010


10,309,062

$
1.28

$
1.24




Option outstandingNumber outstanding shares

Weighted average remaining contractual life years

Weighted average exercise price

Weighted average intrinsic valueAs of December 31, 2010


10,309,062


9.21

$
1.28

$
4.35




F-33

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

14.   SHARE-BASED COMPENSATION (Continued)



Expected volatility


54.1%Risk-free interest rate


4.36%Expected dividend yield


0%Exercise price

$
0.99 per shareFair value of the underlying ordinary shares

$
1.89 per share










15.   CONVERTIBLE REDEEMABLE PREFERRED SHARES



F-34

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

15.   CONVERTIBLE REDEEMABLE PREFERRED SHARES (Continued)



F-35

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

15.   CONVERTIBLE REDEEMABLE PREFERRED SHARES (Continued)



F-36

---



Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

15.   CONVERTIBLE REDEEMABLE PREFERRED SHARES (Continued)



16.   MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION



17.   COMMITMENTS



Years ending December 31,2011


19,2372012


15,5052013


9,8462014


6,0262015 and thereafter


5,63356,247


18.   RELATED PARTY TRANSACTIONS



Amounts due from related partiesDecember 31,2009

2010Amounts due from a director (i)


203


Amounts due from a director (ii)


567


Amounts due from Shanghai Chuanxue Net Technology Co., Ltd ("Shanghai Chuanxue") (iii)





41770


41


(i)The Company extended a personal loan of $203, which was unsecured, interest free and repayable on demand, to a
director of the Company, who is also a beneficial owner of the Company's ordinary shares, in 2008. This loan was repaid in October 2010.


F-37

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Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

18.   RELATED PARTY TRANSACTIONS (Continued)

(ii)This amount represented loans from Xueda Technology, which was to increase Xueda Information's registered capital
and held by a director of the Company, who is also the chief executive officer and a beneficial owner of the Company's ordinary shares. Upon the increase in Xueda Information's registered capital in
August 2010, these loans were settled as the cash advanced to the director had been invested in Xueda Information.(iii)Shanghai Chuanxue is a company majority owned by a director of the Company, who is also the chief executive officer
and a beneficial owner of the Company's ordinary shares. The balance as of December 31, 2010 was unsecured, interest free and repayable on demand.




Years ended December 31,2008

2009

2010Advertising services provided by Beijing 58 City Information and Technology Co., Ltd. ("58 City")


141


42


565141


42


565




19.   STATUTORY RESERVES



20.   RESTRICTED NET ASSETS



F-38

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Table of Contents

XUEDA EDUCATION GROUP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In thousands of U.S. dollars, except for shares and per share data)

21.   SEGMENT INFORMATION



For the years ended December 31,2008

2009

2010Tutoring services


33,939


77,188


154,144Other


167





34,106


77,188


154,144




22.   SUBSEQUENT EVENTS



F-39

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